The Fed has remained inactive versus its QE-crazed counterparts around the globe. Nonetheless, it is still facing a groundswell of anger at its poor stewardship. That tempted it to tighten policy this week to try to quell the rebellion. It once again teased markets for weeks about the prospect. In the end, it joined the BOJ and did nothing yesterday, making it hard for anyone to listen to a word they say. Policy normalization is a fantasy.
If the Fed had raised rates for only the second time of this cycle, it would have done so at a really low growth point for both the U.S. and global economies. After all, year-over-year real GDP growth is at only 1.2% here. That is a level often seen near recessions and points out how full of “hot air” many of the growth bulls have become. We could bore you with a very long list of retailers and restaurants that reported earnings over the last couple of months whose managements have no idea how pundits can continue to beat “the strong consumer leading the economy” drum. That idea is simply hogwash.
Some policy makers are now openly frustrated that they have spent trillions of dollars on QE programs and pushed rates to zero or below without getting any sustained positive response from the real economy. Currencies are not even cheapening as they hoped and that was supposed to be the easy part. Their textbooks were wrong. Meanwhile, all that remains in their monetary arsenal are more negative rates, “helicopter money,” or broader use of outright equity purchases.
If the bureaucrats do back away from asset purchase programs, market volatility will erupt, but it would at least be a move back towards a more normally functioning system, which is desperately needed. Amazingly, talk of banning cash is now being casually floated by the PhD’s as a way for governments to keep control of matters in case negative rates drive depositors to pull money from banks. In response, sales of safes to hoard cash at home are rising and precious metals have had a nice run this year as well.
None of the remaining policy options is desirable. Any further bureaucratic meddling might just push the populace into a full-blown insurrection, while also making it blatantly clear that the system remains in crisis mode. The central bankers are walking a tightrope with alligators below and very unhappy people with pitchforks at both ends. Have no mercy on them! They created this inane framework by constantly employing untested theories while pretending they saved the system from an even worse outcome with no real proof to back that up. What’s more, they have now blown their third bubble in twenty years using the same tired tricks to constantly placate the markets.
We will spare you excerpts from some well-known investors who have recently joined the growing chorus of those wishing that the bureaucrats would simply get out of the way. Many also highlight the unsustainable nature of current markets under the current central banker regime. We will only say that some of the commentary out there makes us look downright reserved in our criticism of current policies.
We admit feeling uncomfortable being almost part of the consensus crowd after years of holding a minority view. However, when we look at recently high equity sentiment and exposures we conclude that many participants must be talking bearishly, but acting bullishly. When we saw a headline proclaiming that “stocks are the new bonds,” we felt a lot better about our positioning. Such open espousing of the idea that the 1-2% dividend yields of equities tells one anything about likely future total returns is simply music to the ears of the bearishly inclined. It sounds pretty bold and cannot be substantiated with any math.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.