A whole lot of reading to get to the meat 2/3 of the way through and some thoughts at the end…
From the Release
In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.
OK. So, if any of us has paid any attention to anything Nassim Taleb has said recently or read his book “Black Swan” (if you haven’t, do it), then we know any prediction past the next three months is essentially worthless. Great, so why the post then and why does that matter?
The prediction of negative GDP for the next 9 months then growth in the second half of 2009 will create a pessimistic environment. People will believe what the Fed predicts will happen. That is good for those thinking of buying stocks now.
A bad investing mood will expect bad news for the next 9 months. If the news is indeed bad, much or the downside from that news ought to be incorporated into stock prices, as Ben Graham would say “Mr. Market is depressed”. Bad news will be looked at in a “we expected that” prism. Equity prices reflect for the most part that future pessimism. Note…this does not mean we have bottomed by any means, just that current equity prices reflect the pessimism of the investing public in the future.
Any news that comes out that is good, will have surprise value. “What if things are not going to be that bad” Mr. Market will think. “If things are not that bad, prices are really cheap” he will lament to himself. He may buy a little and should more good news come out, he may rush into buying stocks causing prices to surge.
The point is, with the Dow (.DJI) at 8000, a recession and negative growth expected for the next 9 months, Ford (F) and GM (GM) teetering and banks desperate for cash, there isn’t much else that could happen that could really “shock” investors save a terrorist attack or another War breaking out. Another bank failure? Seen it. Bigger bailout? Yawn.
On the other hand, any good news of any kind would not be expected and could cause prices to rise…fast…
The point is that either is just as likely to happen based on the inability of economic predictions to be very accurate as we extend the time frame. If the Fed is right, we are there already with expectations. If they are wrong, current buyers could be very well rewarded.
PS. Please note the time frame….9 months. Let’s not expect this to turn by Christmas and be crushed if it doesn’t. Patience…
FULL MINUTES
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