Fed’s balance sheet $4 trillion and growing

This week the Federal Reserve announced their meager QE3 taper of $10 billion per month and no change to the discount rate.  No surprise if you’ve been reading my articles.

Their balance sheet is over $4 trillion and growing at least $75 billion per month.  Not to worry.  The money was created out of thin air, just a journal entry.  It will most likely never be unwound.  Either held to maturity or written off, sometime in the very very distant future.

The danger of the Fed’s current policy is not hyperinflation, it’s that they may have backed themselves into a corner.  If the US falls back into recession…what can they do?  The discount rate is near zero.  QE has reached the point of diminishing returns.  Wall Street will have lost confidence in the Fed’s ability to shore up the economy.  Panic will be the order of the day.

Invest prudently.

Much ado about the Fed

I keep writing about the Federal Reserve’s impact on equities because in my opinion they are the sole source driving the markets.  The Fed’s easy money policy has so depressed interest rates for so long that the distortions have been felt globally.

The current market downtrend, like the others this year, is due to trader’s fixation on whether the Fed will taper Quantitative Easing next week.

My speculation is that the Fed won’t taper next week, or if they do it will be a token $5-10 billion.  In any case, the Fed will keep the discount rate near zero and do their best to moderate short and long term rates.

We’ll all just have to wait and see how the drama unfolds and what impact it has on the global markets.

Obamacare raises my health insurance premium by 50%

Like many of you, I received a notice from my health insurance provider telling me that my current policy wasn’t Obamacare compliant- therefore the new premium would be 50% more.

The increased cost is to provide mandated services like maternity coverage- which I can guarantee my wife doesn’t need.

Forget about the loss of personal liberty.  Ask yourself what impacts Obamacare will  [has already had]  on the economy.

–      Significantly higher insurance premiums

–      Reduced hours for those working ~ 30 hour/week

–      Reduced headcount at small companies

Where do you think our consumer driven economy is headed?

Fed’s Next Move

As discussed in a previous article (Don’t Fight the Fed…) the Federal Reserve is all powerful when it comes to determining the imminent stock market direction [because of their manipulation of interest rates].

What’s worth considering is what happens when the Fed runs its course.  When interest rates have been kept artificially low for too long- then there’s nothing left to cut when the next recession rears its ugly head. 

Such a scenario may be brewing now.  The Fed has artificially kept interest rates low for over five years and continues schemes to inflate the currency by injecting Quantitative Easing (QE).

The problem is that QE is now in its third rendition and the Fed’s balance sheet has expanded to over $3 trillion dollars.  The Fed is purchasing about 80% of US debt.  QE may have reached a state of diminishing returns- the only thing that’s inflating is the stock market and housing prices.

Growth is anemic.  GDP struggles to exceed 2%.  Corporate profits are up but the rate of growth has slowed.  Top line sales are mostly flat.  So what’s the Fed achieving by dumping $85 billion per month into the economy?  Not much:   2013 combined money printing of $1.66 trillion (QE3 + Deficit) has resulted in GDP growth of $386 billion (2.3%).  Would you “invest” $4 to make $1?

The “experts” clearly would, as long as it’s not their personal money.  Pundits are now predicting that the Fed won’t start easing QE until at least March 2014.  These are the same prognosticators that claimed the Fed would start tapering in October 2013.  Many are claiming that the newly appointed chair Janet Yellen is so loose with money that she won’t taper until 2015 or beyond.

Easing or tapering of QE is a serious matter.  At some point it has to come to an end, but there lies the conundrum.  If QE is cut, equity markets will pull back at the same time that bonds decline in value.  Clearly a lose-lose.  Commodities probably won’t fare any better (even precious metals- remember that gold plunged in the Fall of 2008 just like all other asset classes).

The question on my mind is why is Chairman Bernanke departing before the ship is back on course?  His predecessor Alan Greenspan served 20 years and didn’t retire until the age of 80. [Conveniently just before the housing bubble burst.]  Bernanke is only 60, apparently in good health.  We’re told he’s a scholar of the Great Depression and his QE policies have been implemented to avoid another depression.  So why leave after only 8 years when clearly the economy hasn’t recovered?

Perhaps Bernanke is following the lead of Greenspan and plans to exit before the equity bubble bursts. 

Or perhaps his role is to play the fall guy and cut QE before he departs, so the markets will correct and Yellen can start with a clean slate. 

Alternatively, maybe Yellen’s role is to play the tough guy.  Let Yellen cut QE at the start of her administration- better for markets to crash early in her tenure and hope thing work out in four years when she’s up for reappointment.  She can always blame it on Bernanke.

What will happen?  I have no idea.  We live in interesting times.  The prudent investor is patient.  He waits to enter a market when there is a clear sign that a trend is emerging.

By the way, I don’t feel embarrassed admitting I have no idea when the Fed will end QE, or what direction the market will take tomorrow.  I’m in good company.  Recently Alan Greenspan admitted that he was “surprised” that Fed models didn’t predict the housing bubble.  Isn’t that reassuring?

Don’t fight the Fed…until just before the collapse

Today the Federal Reserve announced that they would continue QE3, injecting up to $85 billion into the economy each month.  This should not come as a surprise to anyone.  Chairman Bernanke plainly stated July 10, 2013 “Highly accommodative monetary policy for the foreseeable future is what’s needed.”

Still, the markets were rattled this summer over the threat of “tapering”.  Substantial reductions were never viable.  At most, projections were that the Fed would only tapered a paltry $10 billion per month.

Quantitative Easing (QE) hasn’t produced a recovery and that’s precisely why they can’t get rid of it.  GDP growth occurred at the fastest rate the year preceding QE’s initial introduction November 25, 2008.  Five years into the “recovery” it’s only stimulating equities and real estate. 

Consider the impact of QE3 and federal deficit spending in 2013.  The combined money printing of $1.66 trillion (QE3 + Deficit) only resulted in GDP growth of $386 billion (2.3%).  Clearly, this is not sustainable.

So what’s an investor to do?  Follow the most reliable Wall Street adage ever uttered: “Don’t fight the Fed!”

QE won’t help the ailing economy but that doesn’t mean that it won’t keep Wall Street and real estate prices inflated artificially high.  The trick, as always, is to get out before the bubble bursts. 

This is a good time to watch for upward trends in the market, as has been the past three weeks.  Take advantage of short term moves created by the unending stimulus.  This is not a time for greed, take your profits often and early.