As the Stimulus Withdrawal Process Begins...

Last Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said the Fed would begin reducing its stimulus efforts later this year and finish the process toward the middle of 2014. This news triggered a strong negative reaction in many global markets. (Note: before the 2007 financial crisis, the Fed held assets of about $877 billion; its stimulus efforts increased this amount to about $3.4 trillion, as an additional $95 billion is added each month.) Also, President Obama announced that Bernanke has stayed “a lot longer than he wanted to or was suppose to” in his current position.

Separately, when transportation and logistics firm Federal Express announced its quarterly earnings, its Chief Financial Officer Alan B. Graf, Jr. said. "FedEx Express will further decrease capacity between Asia and the United States in July." Also, when software firm Oracle announced disappointing quarterly financial results, its Chief Financial Officer Safra Catz said, “I just highlight places like Brazil, which pulled down our growth in the Americas and the number of countries in Asia, especially Australia, are being particularly affected by economic slowdown beyond our expectation.”

MY TAKE

• Regarding reduced stimulus efforts - considering that on May 22, Chairman Bernanke suggested the Federal Reserve would begin to reduce its stimulus efforts, last week’s announcement is not surprising. Investors are likely now wondering 1) are positive moves in real estate and equity prices “too much, too fast”, 2) as stimulus efforts decline, will the risk of deflation increase, 3) how will the Federal Reserve reduce the trillions of dollars of assets it used to “stimulate” the economy and 4) who will be the next Federal Reserve Chairman and will the transition be a smooth process
• Regarding earnings commentary from two economic bellweather firms – FedEx suggests a short term slowdown in smartphone related shipment activity, while Oracle may be suggesting more fundamental economic weakness (although some impact from “cloud computing” competitors may also be a factor).
• BOTTOM LINE – in recent years markets have benefited from the stimulus efforts of global central banks. Global markets will likely remain bumpy in the short term as investors adjust to a new set of monetary dynamics and their potential impact on global economic growth.