This time for sure, don't fight the Fed
Any tapering by the Federal Reserve will result in recession.
There is an old saying on Wall Street, don't fight the Fed. This means that when the Federal Reserve is easing monetary policy investors should be buying the market, and conversely when the Fed is tightening they should not. In 2006 I conducted a study that analyzed this philosophy in both tightening and easing cycles; what I discovered surprised many people then, but comparisons to today may surprise even more people now.
First of all, in normal economic cycles prior to 2008, when the Federal Reserve actually could adjust interest rates to affect monetary policy, they did so based on the health of the economy. Economic growth went through cycles and the stock market did as well, but at all times, even during the Internet debacle, the economy could stand on its own two feet. The viability of future growth may have been questionable from time to time, but underlying economic activity was still able to sustain itself.
From 1981 through 2007 the economy was in the third major up-period in U.S. history according to the Investment Rate (StockTradersDaily). This tool identified the conditions that existed even after the Internet debacle as being within a naturally positive economic cycle, and thus the economy was still sound enough to support itself.
Conceptually, if the Federal Reserve is easing monetary policy because the economy is weak investors should expect weak stock market conditions too, and that is exactly what happened prior to 2008. When the Fed applied easy monetary policies by lowering interest rates, the market came under pressure. Conversely, when the Fed applied tight monetary policies, they did so because the economy was too strong, and during those tightening cycles the market performed quite well. Because the economy was strong and despite the Fed's efforts, stocks reacted positively during tightening cycles.
Thus, prior to 2008, investors should actually have fought the Fed, but that may not be the case today. The Investment Rate told us we were in a positive economic cycle then, the economy could stand on its own two feet, and investors could comfortably assume that monetary policy was changing because of stronger or weaker economic conditions than the Fed liked. Inflation is obviously part of this equation, but economic conditions are the focal point and always have been.
Even after 2008, economic conditions have been the focal point, but material changes have also happened. In December 2007 the end of the third major up period in US history, the one that began in 1981, came to an end according to the Investment Rate. The end of that upward sloping period also brought the beginning of the third major down period in U.S. history. As a result, the underlying conditions in our economy are different today than they were even during the Internet debacle. The underlying conditions in our economy today are deteriorating on a naturalized basis, where before they were actually improving on a naturalized basis year after year.
The difference here is very important to recognize, and it leads us to a determination when we reconsider the adage of not fighting the Fed. During upward sloping cycles in the Investment Rate, changes to interest rates gave us an indication of market direction as noted above, but in this downward sloping cycle, with interest rates at virtually zero and monetary policy based solely on capital infusion, the playing field has changed.
Now, the the economy is deteriorating naturally and only the infusion of capital by the Fed has kept it afloat. We are in a third major down period in US history according to the Investment Rate, and the Fed has to infuse more and more capital into the system every year to offset the deterioration. It cannot taper stimulus policies because the economy will contract measurably, and therefore the adage of don't fight the Fed is not what it was prior to 2008.
If the Fed begins to tighten, or taper in this case, it will be removing the lifeblood of the economy and what we knew to be true prior to 2008 will no longer be so. This time, don't fight the Fed will mean sell everything, including housing, stocks, businesses that cannot sustain a recession/depression, and any other asset class that might be dependent on new money to grow. When I say sell everything, in particular I mean things tied to the direction of the SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY) , PowerShares QQQ Trust, Series 1 ETF (QQQ), and iShares Russell 2000 Index ETF (IWM).
Well I think that's what we have been saying for several years. That's the whole point isn't it? Since the entire recovery has been due to money printing it will collapse when they quit printing money.
People no longer have access to jobs that pay a living wage. Free trade necessarily means that our standard of living will equalize with those of our trading partners. The last two bubbles were attempts to camouflage that from the general public. We have been artificially propping ourselves up since the 80's, falsely believing that we were prosperous when we were actually selling our future for short-term stock or housing profits. It wasn't real prosperity then and what the Fed is doing isn't real now.
When they stop it will go back to where it was in 2008, only the banks will be healthier.
The Great Recession never ended! This sinking economy has been kept (marginally) afloat by reckless injection of trillions of dollars of imaginary money. Even as the money supply has expanded, the velocity of the money supply has slowed to a crawl. That's what Depressions are made of.
We'll see the Fed pull back, the economy go straight into the tank and enter a period of deflation unseen for the last 80 years. Then (brilliantly!) the Fed will resume enormous "stimulus" of the economy by printing insane amounts of money, and we'll enter a period of hyper-inflation. This process will destroy the value of money, and our wealth will evaporate. Buy Gold with both hands!
Okay: "This time, don't fight the Fed will mean sell everything, including housing, stocks, businesses that cannot sustain a recession/depression,..." Is there ANY point at which we say there is to much QE? 'We're at a 28% inflation rate right now, When the dollar is worth 50% less? When the dollar is worth 100% less? When a loaf of I bread costs $50. Just when?
Well, that is extreme. Sell everything? Ok gold was going to $5000 before it tanked. So much for advice.
Ok, fed tighting will not be fun, but not the end of the world. Stagnation like the 15% inflation days of the 80's ... sure.
Nobody ever made money thinking the world was going to fall apart. Succesful investors are optomists by nature. The fearmongerers write articles for MSN from their parents' basement.
Don't forget France after 1789, this country during the revolution, most countries after WWI and WWII.
They all INFLATED and their currencies ALL LOST most of their purchasing power.
They ONLY way this is going to end, if the fed doesn't stop creating money out of thin air, is massive hyperinflation like Germany 1914-1923. The value of the German mark went from 4.2 marks to the American dollar in 1914, to 4,200,000,000,000 in late 1923. For a very good history of the period read When Money Dies.
Even if the value goes down to $500 an ounce for gold, and $30 an ounce for silver, it's STILL going to be worth more than fed paper!
Quietly sold out first of last month and feel relieved.
Market may go up a little while longer but when they pull the QE it's recession time.
Coincidentally I'm at retirement time and sold my business also.
Don't think the US economy will survive the 85B a month loss.
For your opposite thinkers you might think it will survive.
I say no, because it wasn't surviving before 08 without the 85B a month infusion.
Say why would you think it will this time?
Be safe, take your profit, don't be greedy to the last minute.
Get out now and preserve your run up profit.
That way you can come in after the fall and pick up good bargains.
“If we don’t let the Fed print counterfeit money and make Wall Street rich the economy will tank and you will all suffer.”
Gee, this argument sounds eerily familiar to the one Hank Paulson used to get Congress to write him a blank check and bail out the banks with TARP.
Come on folks, did you really think they were going to stop selling it once they saw you buy it?
I can't wait for the Fed and it's Wall Street masters to have their little ZIRP party shut down, which amounts to nothing more in the end than the greatest government sponsored theft and transfer of wealth to the rich in all of history. Only then can asset prices revert to a sustainable level for the long run.
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