As Ray Dalio mentioned yesterday, we’re in the sweetspot of the cycle. And boy is it sweet for corporate America. They’re sitting on near record margins, high double digit revenue growth and a bottom line that has swelled to record levels. There’s a dilemma building, however, for the markets. While corporate America recovers and begins to pick-up hiring Wall Street has another problems on its hands – the Fed. The Fed’s easy money policies and explicit backstops have been a boon to banks and traders all over the world. Shorts have been squeezed out of the market and those who levered up on equities have been handsomely rewarded by the Bernanke Put.
As the labor markets recovers the Fed will be pressured to end its easy policy approach. It’s clear that QE2 was never really necessary to begin with. The fiscal policy of the last 2 years, specifically, a massive 10% budget deficit is injecting the private sector with the cash that is needed to offset the effects of de-leveraging. Monetary policy has helped, but to a far lesser degree. And QE2 has actually shown substantial signs of detracting from the recovery. But Wall Street has loved it and rightfully so – never has there ever been such explicit commentary from the Fed that encourages speculators to go out and bid up risky assets.
But while more jobs might be great for Main Street they’re bad for Wall Street. Not only will investors begin to worry about corporate margins and being closer to the end of the equity cycle than the beginning, but the pressure will mount for the Fed to finally raise rates and most certainly end QE2. This doesn’t mean the bull market will be over, but a few large NFP reports will likely put pressure on the markets as they begin to discount the potential for a tighter Fed. For Wall Street, less is better. A big miss in Friday’s NFP report is not a bad thing. And a level not too hot and not too cold (150K or so) is just right….This ensures an easy Fed, continued profits, and likely higher stock prices. Of course, for Main Street it stinks, but this recovery was never really centered around helping Main Street anyhow….Why start now?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.