There was no place to hide in June regardless of whether you were invested in equities, fixed income, or commodities. While we were getting close to correction territory (10% loss or greater) in equities after Ben Bernanke hinted at ‘tapering’ the FED bond purchases as soon as September, the markets quickly rebounded after several FED board members came out and said that the markets misinterpreted Bernanke’s comments. The other boost to the markets the last week of June was a weaker-than-expected revision of the 1st quarter GDP figures. Yes, you read that correctly. The boost from a not so positive GDP print is bad news, but it also means more of the well-received money printing will likely be on the way.
It is our opinion that we could see no tapering of bond purchases, and frankly, see an enhancement of the bond purchases later in the year. Our conclusion comes from the fact that the FED is not getting the inflation it is looking for – quite the opposite. The velocity of money is languishing, wage pressure is nonexistent, and employment is truly not healthy. Why the talk of ‘taper’ you ask? Keep in mind that all the money printing and global currency debasement is unprecedented. Therefore, there is no textbook response to this particular global economic funk. Accordingly, the FED has to test the market and economic waters and the respective reactions.
It is important to remember that in each of the last three years the FED (and many economists) all expected better second halves of the year and began talk of not continuing QE. Unfortunately, the second halves of each of the last three years turned out to be duds resulting in new, larger QE programs. Consider the following quote from Scott Minerd, Guggenheim Investments’ Chief Investment Officer:
“When the Fed starts talking about how it’s going to unwind this thing, there are just so many problems in that process that it’s virtually impossible for them to pull that off without making some kind of policy accident. There are only two policy accidents they can make: They can shrink the balance sheet too fast, or they could not shrink it fast enough.
If they shrink the balance sheet too fast, that means it’s going to induce recession. Given what we’ve just been through, and given all the concerns we have about employment, the FED is not going to want to run the risk that it shrinks its balance sheet so fast that it induces a recession.”
The above quote very concisely presents the corner the FED has painted themselves into. Therefore, we are likely to see volatility rise as the FED struggles with how to start unwinding. In the meantime, we see the US as the best market for investment as the world struggles with the might of the FED’s printing press.
Just this past week the US market again moved higher as a result of the reassurance from the US Federal Reserve that accommodation is here to stay for a while longer. We will presume you did not read the June 2013 Federal Open Market Committee minutes of the FED that were released. Additionally, we think it is probably a safe bet that you did not watch the Ben Bernanke press briefing this past Wednesday. To be clear, we don’t blame you for not tuning in to either. Prior to the year 2000, no one cared what the FED Governors did or said. However, since 2008, the FED is THE market mover. Of course, we did tune in and took a few notes. There were only a handful of really important points from both the minutes and the press conference.
For the most part, the clarity that the FED thinks it is providing, with all of its communications, is really leaving market participants more confused. The FED, as has been the case for years now, continues to vacillate between wanting to slow its accommodation to the economy and speeding it up. Below are the highlights from the minutes and press briefing. Our comments follow.
From the minutes:
“About half of the participants indicated that it likely would be appropriate to end asset purchases late this year.”
“A few participants indicated that the committee should slow or stop its asset purchases at the June meeting.”
From the press briefing:
“Highly accommodative monetary policy is what is needed for the foreseeable future.”
“Right now we have an unemployment rate of 7.6%, which I think, if anything, overstates the health of the labor market.”
The first two quotes above, from the minutes, make it crystal clear that there are a lot of differing opinions on the Open Market Committee. The striking point in the first two quotes is that there are some members (half) that think the FED’s bond buying should end later this year. In other words, the idea of tapering is not being considered, but a full-out stop by half of the board members.
In the past few weeks, as the taper talk from the FED has bounced around, keep in-mind that there is a big difference between the unemployment rate falling, and the labor market’s health. The last quote above is pretty clear that the FED likely will try to hold interest rates near zero even if their target of 6.5% unemployment is met.
When we consider all of the above quotes, we have no more clarity on when the FED-induced liquidity party will end. The one thing we can parse from the statements is that there are strong hints for market participants to keep in mind that the FED’s expanded balance sheet, and further additions, are two different things. Said otherwise, tapering and exiting are two different things. Tapering, which has been the topic lately, involves reductions (or stopping) further bond purchases that add to the FED’s balance sheet. Exiting would involve the FED selling bonds that it is holding on its balance sheet. Over the years, the FED has tried to stop purchases only to see the economy and markets move in the wrong direction. Seeing that the economy is still functioning at stall speed, we think the FED is more likely to do nothing, or try to taper, only to have to expand further. As for an exit, the FED is far from trying to exit and let the economy stand on its own without falling on its face. Such is life in the markets once the economy is addicted to cheap money.
So long as the global central bank liquidity faucet stays open, we will cautiously invest client money. It is critical to remember that the longer such market distortions stay in place the messier the exit will be when it eventually happens.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.
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