John Mauldin's Weekly Newsletter: Daddy’s Home

Here is the link to John Mauldin's weekly newsletter.  Below are my highlights although there is a section of his newsletter that covers the European crisis and specifically what Germany is doing which is worth the read.

• So why did the Fed continue Operation Twist? Because the market (that amorphous, omnivorous blob) expected something from the Fed. This summer’s version of Twist and Whisper was about the least they could do.
• This is the economic equivalent of walking into a room full of your anxious children, patting them on the head, and saying “Daddy’s home; everything will be OK now.” It was basically all they could do short of another full-blown quantitative easing, and I believe they think they really need to save the QE psychological bullet for another time, when we may be in even more serious straits. (Which if you buy their rationale is the correct thing to do.)
• I have never been a fan of the phrase “the market is a forward-looking indicator.” What was it telling us the summer of 2007? It was certainly not signaling a recession within a few months. The NYSE index was only 3% off its low and climbing in 2000, and we were already in recession. Did we have a recession in 1998 or 1987 following those bear markets?
• Maybe I don’t have the volume turned up, but I just can’t hear the market telling us anything about the future that we can hang our hats on. Over the shorter term it is very good about giving us clues about current emotional drivers and momentum investing, but for the direction of the economy we need to look elsewhere.
• My last observation about Fed interest-rate policy is that it is punishing those who have worked and saved all their lives and had hoped to retire and be able to clip coupons. Unless you have a large amount of money, you can’t live off the interest income you get on what used to be the standard bond portfolio that was recommended for those who were either retired or close to retirement.
• But low rates punish savers and leave them with less money, so that hurts retirees’ final consumer demand – or that is the view from the cheap seats where I sit. And retiree income and spending is a growing portion of the economy. Hurt that, and it’s a sector big enough to have consequences. I know that economists can argue that the trade-off is positive, but it seems to me we are defrauding a generation or two of hard-working savers. You did what you were supposed to do, and your reward is a ten-year bond at 1.5%. Since you paid off your mortgage a long time ago, the lower rates don’t help you either! So you either cut back or move out the risk curve. While better yields can be had with some serious research and homework, it is not easy.
• It was not just in Wisconsin that voters said Tuesday a week ago that deficits matter. I think those municipal votes are highly indicative of a tectonic change, as voters look to the future of government deficits and start to say “Enough! Stop!” It can’t happen too soon, as our train chugs on toward the debt cliff.