In the wake of the Fed's surprise September decision to
postpone the start of that process, Wall Street's short-term thinkers did a
complete 180.
They went from predicting a near-immediate start to tapering
to predicting that tapering wouldn't start until well into 2014, perhaps as
late as June.
[Editor's note: To learn how the Fed's new policy can hurt
your investments, click here for an audio extra.]
One market watcher at Deutsche Bank went so far as to
literally suggest the Fed should ask itself: "Why bother to taper at all ?"
Me? I've tried for several months to take a longer-term view
and not be swayed by every market gyration. I've also tried to be as crystal
clear as I can about something very important: The ongoing rounds of QE have
been positively useless when it comes to bolstering the "real"
economy.
[While there was no clear signal on when the Fed might scale
back QE, the post-meeting statement was more bullish on the economy than some
were expecting.]While there was no clear signal on when the Fed might scale
back QE, the post-meeting statement was more bullish on the economy than some
were expecting.
The Fed, over several years and a few trillion dollars of
bond buying, has failed to deliver GDP
growth of 3 percent, 4 percent, 5 percent or
more, growth that would represent a strong recovery. The Fed has failed
to spur companies to add 300,000 or 400,000 jobs a month. And the Fed has
failed to trigger huge growth in durable-goods orders, lift consumer sentiment
or give us 1990s-style manufacturing or service-sector strength.
Instead, the economy has gradually healed over time on its
own. It isn't growing at a brisk pace, but it isn't shrinking either. There's
nothing out there to justify the lowest level of interest rates in history, for
the longest period of time in history. Nor is there anything going on to
justify the same kind of massive money
printing we saw in the depths of the Great
Recession in 2008.
So what did QE "accomplish"?
It managed to inflate the biggest bond bubble in the history
of the world. That sucked in millions of investors, who collectively shoveled
roughly $1.4 trillion into bond mutual funds and ETFs chasing performance —
just like they poured money into tech
stocks in the late 1990s.
The threat that can make you 10 times richer over the next
five years
Wars and rumors of war in the Middle East have already
boosted many natural resources and energy stocks. But that's nothing compared
to what will happen when a series of
cascading regional wars break around the globe, triggering one of the greatest profit opportunities in a
hundred years.
Internal Sponsorship
The problem is that bubbles and bubble-inducing policies
can't continue forever. They eventually reach a point where they collapse under
their own weight. I believe we saw the first phase of that collapse this
spring, and now, the second phase of
that collapse may be about to get under way.
That brings me to this week's Fed meeting. As expected,
the central bank on Wednesday did nothing in terms of
changing policy — it maintained the
$85-billion-a-month pace of asset purchases. And, as expected, the Fed
continued to talk about maintaining relatively easy policy.
But I believe the post-meeting statement was actually more bullish
on the economy than some were expecting. The Fed said that "the Committee sees
the downside risks to the outlook for the economy and the labor market as
having diminished, on net, since last fall." And also that "the
Committee sees the improvement in economic
activity and labor market conditions since it began its asset-purchase
program as consistent with growing
underlying strength in the broader economy."
More importantly, the Fed mentioned in a couple of places
that fiscal policy was the problem. That suggests to me that the Fed thinks
market players should stop counting on monetary policy to solve the economy's
woes. The statement also reminded investors that "asset purchases are not
on a preset course, and the Committee's decisions about their pace will remain
contingent on the Committee's economic outlook as well as its assessment of the
likely efficacy and costs of such purchases."
In short, I've been reading and analyzing Fed statements and
speeches for a long time. I can tell you that many on the Fed have clearly been
nervous about the bubbles their policies are inflating, and clearly want out of
QE.
This week's statement did nothing to dispel that belief. As
a matter of fact, it went out of its way to gloss over the economic impact of
the government shutdown, to reiterate that QE has costs, and to make it
abundantly clear that QE is not on a pre-set course.
So, no, I do not believe QE will go on forever. I do not
believe tapering is off the table until kingdom come. Instead, I believe QE
will likely die a slow death over the
coming months and that, afterward, the Fed will be forced to actually raise short-term interest
rates sooner than the market currently
expects.
That's why I remain extremely leery of many fixed-income investments.
It's also why I'd rather direct my funds
to specific stocks and sectors that have little or no interest-rate exposure,
and that do not need massive infusions of QE to deliver solid results.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.
The Fed's Failed Strategy Is Dying a Slow Death,
Mike Larson, Date: Friday, November 1, 2013
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