The longer, the better
We're obviously well into wild-guess territory here if we're comparing some hypothetical schedule for selling down the portfolio to some hypothetical schedule for a mix of Treasury sales and portfolio run-off with Treasury maturities.
But both approaches, the conventional wisdom and the potential "let them mature" approach have one thing in common: They get a lot easier and are a lot less risky if implemented over more time rather than less. Ending the quantitative easing program of asset buying and then selling off part of the Fed's portfolio of Treasurys and mortgage-backed securities is a lot less likely to crash the economy if the start of that effort can be delayed as long as possible and the effort can be stretched over many years.
Same with a "let them mature" approach. This works only if the Fed has lots of time.
So how does the Fed get more time?
Well, there's remarkably little that the Federal Reserve can do itself. The Fed really only has control over short-term interest rates, so there's very little it can do to stop an increase in medium- and long-term interest rates if bond buyers decide they need higher yields to compensate for higher inflation or for a larger supply of Treasurys (and therefore depressed prices).
That's especially true if the Fed is trapped in a scenario where it can't go back to buying Treasurys in these maturities to reduce rates because the central bank is now trying to sell these same assets.
Lower economic growth would give the Fed more time to execute its strategy of either selling or maturing. But that's not an especially palatable alterative.
Remember, the Fed would like to be able to reduce its balance sheet without pushing the U.S. back into a recession of exactly the sort that all this asset-buying was intended to end. That would confirm the opinion of those critics who say that the Fed's whole quantitative easing strategy is doomed because any short-term increase in economic growth will prove temporary. The economy will give back all those gains and more when quantitative easing ends and the Fed has to vacuum up the cash that it pumped into the economy in the first place.
The right crisis here or there
If only the Fed could find a way to increase demand for Treasurys. That would do the trick too. But short of increasing yields -- exactly what Bernanke and crew want to avoid -- the Fed doesn't have any way to increase demand for government paper.
But the right crisis here or there could do the job very nicely, thank you. If another turn of the eurozone debt crisis sends the euro back down against the dollar and produces another flight to safety that sees bond buyers snapping up U.S. Treasurys, that would be exactly the kind of demand increase the Fed needs.
Recent flight-to-safety moments have seen so much demand for Treasurys that yields have actually fallen. For example, the composite yield on Treasurys of maturities of 10 years or longer hit its 2012 low at 2.11% on July 25, just before European Central Bank President Mario Draghi's speech promising to do "whatever it takes" to save the eurozone.
Now the Fed couldn't conjure up a crisis in the eurozone -- or in some other part of the global financial system -- even if it wanted to. And there's no evidence that the Fed is wishing for another significant crisis anywhere. A crisis in another economy, especially in the economy of a major trading partner, would take a bite out of U.S. economic growth just as the Fed is trying to get that growth to self-sustaining levels. And if a crisis became serious enough, it would force the Fed back into the front lines of battle to make sure there's enough liquidity in the global system just when it is trying to reduce its role in that area.
But wished for or not, with all the nasty consequences a crisis brings, it is nonetheless true that the right amount of crisis -- enough to send some extra demand toward Treasurys on moderate amounts of fear and yet not enough to imperil U.S. economic growth or U.S. asset prices -- does buy the Federal Reserve time to execute whatever exit strategy it has decided to pursue with lower risk.
Stocks look good through September
I think the eurozone should provide that kind of just-right crisis through the German elections in September. Politics will make it impossible for eurozone countries to make significant progress on any of the issues confronting them until after German Chancellor Angela Merkel faces German voters.
The Fed needs more time than that, however. Will the U.S. central bank get it? It depends on how deep the recession gets in France and how badly Italy and Spain miss their budget targets because of the recessions in those countries.
Through September, a series of new crises in the eurozone should be enough to keep U.S. medium and long-term interest rates low. That in turn should keep worries about a Fed exit strategy from significantly depressing U.S. stock prices.
A rally in U.S. stocks during this period has clear sailing from monetary policy. Now all investors need is for companies to deliver earnings growth and for Washington, D.C., to avoid doing anything stupid.
That doesn't add up to the greatest odds that I've ever seen in favor of a rally. But it does suggest that the market stands a reasonable chance of advancing and it does tell you where the risk lies in this period.
After September's German elections? My guess at this point is that we'll see an outbreak of progress on eurozone problems in the months after the election that will reduce the need for investors to seek the safety of U.S. Treasurys.
I'd certainly want to revisit the odds for another round in the eurozone crisis and for the likelihood that the Fed might get the time it needs to execute its exit strategy in the October-December period.
Updates to Jubak's picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios.
- Oil discovery triggers black gold rush
- Mining stocks are still dicey
- Now is the time to seek out bank dividends
- Never underestimate Intel
- McDonald's finally catches a break
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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"The Fed's actual operation is much more sophisticated than printing Jacksons and dropping them out of helicopters..."
Are you sure about that?? I just thought Benny printed it up and gave it to all of his buddies in the banking industry and Wall Street....
If Ben "Dover" Bernanke is involved, I have NO faith in it.
As nearly everyone has been saying for years, the fed has created a phony economy that is totally dependent on their money printing. If they ever stop printing, the economy will immediately collapse. Further, they are dreaming if they ever think they can “sell” the existing $4T debt “balance sheet” they have accumulated. Who would want to buy it at the interest rates attached to it. Their only option would be to hold it until maturity.
Does any one think about what crisis we are talking about? Why we are having a quote un quote crisis?
I doubt most people think about the why, they just know we have one. But it is important and educational to identify the why. If anyone does think about the why they probably say it was the banking crisis. The reality is far far different.
Sure we had a banking scare. There was a flash, some fear, then some shoring up of banks, and then stablization as EVIDENCED BY THE FACT THAT THE BANKS PAID THE "Bailout" MONEY BACK. But even this relatively non-event is of little importance. The fact is there would not have BEEN ANY BANKING problem if we had not had a real estate bubble, which had nothing to do with the banks. The bubble was FUELed by easy money from the fed (ie low interest rates) since the recession of 2001. EAsy money, meant lots of people could borrow lots of money. And contray to popular myth and media hype most of the loans were not "subprime". Anyway , like all bubble, the bubble was fueled by people’s greed to make money, buying more house than they could afford partly on speculation.
Now this is largely over. What is not over is the crisis and the crisis is world socialism. Govenments promising gifts to the people, growing those gifts four times faster thatn the underlaying economy. Surprise that musical chair can not continue forever. Obama grow the U.S government by almost 25 % in four years (2.9 trill to 3.8 tril). Just the facts boys!
The crisis is socialism. If the crisis were subprime loans or a real estate bubble, Cyprus would not be confiscating wealth! What real estate crisis did they have. What about France, or Spain, or Ireland, or or or or. No folks the crisis is massive government.
"European leaders have shown a remarkable ability to drag out the crisis with partial solutions that turn out, upon examination, not to be solutions at all."
The EXACT same 'dragging out' or can kicking process is occurring here in the US. Somehow the FED and the Oboob government have convinced the 'markets' that there is a recovery underfoot. Well...there certainly is a lovely recovery occurring for the TBTF bankers, who are making a pretend killing in the stock market using interest free toilet paper money that helicopter 'Benny Bucks" Bernanke is throwing at them. At the same time, the pretend recovery has convinced not a few hapless small investors to throw away yet more money hoping that they, too, can be rich and have that illusive comfy retirement. Aingonna happen! All that pretend wealth is going to vaporize....return back from whence it came; nowhere. Jim Kunstler said it best: in the end there will be people with a lot of money that isn't worth anything and those with no money.
Now here's the Rub, instead of giving the banks $700 billion, they literally got three times or more that amount. So if a guy comes to you for 100 bucks but you give him 300, it can't be claimed he paid in full if he turns around and gives back 100 bucks and calls it even. That's the myth that Mainstream Media and some posters are spreading. We all know why the Big Banks are spreading that Myth.
The "crisis [in Europe] buys time for the FED" to unwind their printing money policy.Really?
Funny, it was my understanding that the crisis in Europe had nothing to do with why the FED was printing money. The FED (we have been told), has been printing money to stimulate employment.
According to the FED, printing money won't stop until unemployment falls to 6.5-percent. Why doesn't the FED just have the BLS numbers falsified (to a greater degree then they already are)? Tell the whole world that unemployement is over and stop printing money the same day? Why not?
The day that the FED stops printing money is the same day the market tumbles 85-percent, because the FED printing money has been the only reason the heart has kept beating in this dead, zombified economy.
If BO had any sense he would have stopped gentle Ben or replaced him. There was no need to infuse 2 trillion (deficit spending and printing) into the economy each year we don't have. It may have been a little rougher in the short term but much healthier in the long run.
This extra 2 trillion a year we don't have our govt is spending is like sugar cookies now and is going to blow up the economy when it ends. It will make it much worse. I am betting and preparing on the last option .... rates are going to pop up on the national debt making our interest payments on it explode. A debt bubble and dollar bubble are coming to a theater near you. Just a question of when.
Scam Financial Derivatives is the sole reason for the financial collapse. If the banks don't lever up 10 to 1 or worse, this crisis doesn't happen. Big Ben isn't still buying bad assets off the banks balance sheets.
The QE's and low rates are not in place to help the economy.
The QE's and the low rates are in place because of the $16 trillion debt not to help the economy. If those rates were to rise even 1 or 2 % the interest on the debt would be unmanageable, that is the reason they won't be going up any time soon. They have been in place for years, if they were designed to have an effect on the economy they would have done so by now, yet we're still stagnating.
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[BRIEFING.COM] A solid November employment report translated into a solid day of gains for the major averages. While there was some talk that the encouraging job growth raised the odds of the Fed announcing a tapering at its December meeting, the message of the markets today was either that it didn't believe there would be a tapering this month or that it doesn't fear a tapering this month.
It was just one day, yet there was ample meaning wrapped up in the connection that the 10-yr ... More
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