Unwary investors or mindless media?

Although I generally have a lot of complaints about the media, I actually do find quite a bit of semi-reasonable reporting in The New York Times. Investing is one exception. Rarely do I read an article on finance or investing in The New York Times that isn't really, really bad. For all of the quality reporting they have in other areas, they compensate in spades with extremely low quality when it comes to reporting on finance and investing. Sure, on occasion some quality reporting on finance does slip out, but that is the exception rather than the rule.

It may simply be that Gretchen Morgenson has undue influence at the paper, or maybe there is some deeper, darker source for the really bad finance and investing reporting.

I pen this post in response to an editorial in The New York Times entitled "Unwary Investors - Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk." The Times started off with the truly outrageous claim that "in this week's upswings, investors have seemed especially heedless of dangers lurking in the economy." That is complete nonsense. It is in fact the Times itself, with its financial yellow journalism that is "heedless" of the underlying strength of the U.S. economy and our financial markets.

The Times speaks of "a lot of reasons to worry", but this is merely part of their yellow journalism shtick, designed to paint lurid headlines and sell papers, rather than a serious attempt to enlighten "investors."

Their final paragraph illustrates how out of touch they are:

Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk. The fact that after years of profligacy the federal government is fiscally ill prepared to respond to a destabilizing downturn only increases those risks. The Fed might — or might not — be able to engineer a rescue. In the global economy, the past performance of Fed rate cuts is no indication of future results.

I'll be the first to admit that the Federal Reserve is not perfect, but the Times does not even come close to being in a position to criticize the Fed.

For some reason, the Times got it in their collective head that serious investors actually believe that the Fed thinks in terms of using rate cuts to "rescue" investors. It was never the case, is not ever intended to be the case, and is not now the case. The Fed does intervene in the sense of seeking to maintain price stability and to ensure ample liquidity in the financial system, but never to intervene for the sole purpose of "rescuing" investors. Sure, there is a myth to that effect floating around (sometimes referred to as "The Greenspan Put"), but shame on The Times if their reporting is so bad that they can no longer distinguish fact from fiction.

The Times makes its case as follows:

On Wednesday, the Federal Reserve signaled that it was neutral on what its next interest rate move would be. Investors immediately took that as implicit assurance that the Fed would cut rates — presumably bolstering growth — if the economy slumped along with the mortgage market.

First of all, the Fed did not "signal" that it was "neutral on what its next interest rate move would be." That is a very false characterization. The Fed did in fact remove some extra language that placed a stronger than needed emphasis on rate hikes, but the Fed continued to warn that it was biased in favor of worrying more about inflation than economic weakness. The Fed is decidedly not "neutral."

To be sure, since August the Fed has pinned its hopes on 5.25% being the interest rate where the economy would gradually settle into a steady equilibrium between reasonably strong economic growth and reasonably low inflation. The hope all along has been that the "pause" will hold for an extended period of time. Nobody has yet come forward with a credible case to counter the Fed position. Many have tried, but they all have problems, not the least of which is a disconnect from reality.

Given that inflation has continued to remain higher than the Fed's comfort level, it has been only natural that the Fed would be sitting with its finger on the trigger, ready to hike rates a little more to keep inflation firmly subdued. That was always only a stance, a form of preparedness or insurance, just in case, the original and still appropriate bet on 5.25% somehow turned out to be a little too low.

But, given the ongoing weakness in the housing market and significant anxiety over mortgage-backed securities, a Fed looking too eager to hike rates was a little too unsettling to many people. Given that the Fed could palpably sense fear in the markets, there was simply no longer any reason for the extra strong language that focused too much attention on the potential for hiking rates. In other words, the language was in there to balance an excess in exuberance, but is no longer needed as that former exuberance has evaporated.

As I said earlier, even without the extra strong language, the Fed still retains a decidedly hawkish stance towards the potential for raising rates to combat inflation. To wit, the Fed said in its most recent FOMC announcement:

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.

I have to laugh. Those words from the Fed in the latest FOMC announcement are in fact incredibly hawkish. For The Times to consider them "neutral" is truly absurd.

Also, it is a mistake for The Times or anybody to mistake the movement of the markets over a day or two or three by traders and short-term speculators as an indication of the sentiment of "investors." My standard pitch is that the markets always need at least three or four days "for the dust to settle" before we can get a good reading of what investors (as opposed to traders and short-term speculators) really think of the outlook implied by the Fed's actions and announcements. Also, it makes sense to wait for at least three Fed officials to speak in public after an FOMC meeting to reliably gauge the Fed's true posture.

For the record, I personally believe that the Fed is likely to "stand pat" for the entire rest of the year, but I also believe there is a fair chance that the economy is actually stronger than even I think, and that another hike may be needed in the May or June timeframe.

-- Jack Krupansky