- Post 03 July 2013
- By The Michigan Chronicle
- Hits: 236
At the June 19 Fed meeting, Chairman Bernanke indicated that a strengthening economy would cause the Fed to 'taper' its bond buying activity commonly known as QE3 (Quantitative Easing 3, no one really remembers QE1 and QE2 because they really didn't work.) The Fed Chairman then proceeded to repeat a statement almost verbatim that he had said in several previous press conferences. As the economy got better, the Fed would not need to keep pumping money into the system," says Leon LaBrecque, JD, CPA, CFP, CFA, and the Chief Strategist and founder of LJPR. "I likened it to the doctor saying, 'As your hip gets stronger, we can wean you off of the pain medication'."
"The last thing the market wanted was to be weaned off of pain medication, despite the fact that the doctor did not actually do any weaning, but merely inferred that said weaning might take place. The stock market plunged, the long term bonds plunged (we have almost no long term bonds, thank goodness), gold plunged. Our take? Complete overreaction," says LaBrecque. "But weird overreaction, not unlike the strange under reaction of the first five months: all bad news – sequester, terrorist attack, North Korea, Cyprus and the market soars. Good (or maybe even just neutral) news, as the economy gets better, the Fed will quit injecting dollars to prop it up and the market tanks."
"What is the reality? All the world's central banks are pumping money at high pressure and volume to get their respective economies moving. That's China, The ECB, the Bank of Japan and the Fed. The dollar numbers are mind boggling: the balance sheets of the Central banks have gone from $10.4 Trillion in 2007 to $20.5 trillion today," says LaBrecque. "By my calculations, the balance sheets of the Central Banks are equal to 30% of the world's GDP! So, the question is: if the treatment is working, don't we want it to eventually stop? In other words, if the easing stimulates the economy, then don't we logically want to get off of the QE drip?"
"Irrational market behavior is nothing new. Our approach is to maintain a cautious allocation and keep our mix properly balanced. We hope the Chairman is right in his view that the economy is continuing to improve. The Sequester has done wonders to the deficit: It's gone from well over $1 trillion to around $642 billion. The deficit was 10% of GDP in 2009, and is now rapidly approaching 2%," says LaBrecque. "For now, we see continuing slow growth and hopefully a tapering of Fed policy. And, it seems, we need some bad news to stimulate the market...or do we need good news?"