Friends
Over the last few weeks, we have heard a lot about the Federal Reserve and “quantitative easing”. Just as a reminder, quantitative easing is the process where the Fed tries to stimulate the economy by asset purchases. In other words, to increase the money supply, the Fed buys bonds (thereby pushing money into the system) to try to stimulate lending and increase liquidity. Back in December 2008, we talked about the Fed being “all in”, whereby Mr. Bernanke declared that the Fed basically would do anything it had to do to save the economy. What happened next was a series of interest rate cuts (eventually getting to zero), and after that came the first round of quantitative easing. Now we are hearing about a second, but smaller round of asset purchases that the Fed may begin later in the year. Next week’s employment number may be the trigger that begins the easing process.
What does this mean for us and our investments? Well, if the unemployment number is noticeably better (not likely), then one could determine that the economic landscape may begin to improve. That would be good for stocks and not so good for bonds. If the unemployment number is bad, then a second round of quantitative easing would be expected. In that case, bonds – at least in the short-run – would rally (rates going even lower) and stocks most likely would rally too. Why? because again: “don’t fight the Fed” (are you tired of me saying that yet?). If the Fed continues to be “all in” then stocks should continue to rally. In general, since the declaration back in December of 2008, stocks have rebounded about 45%. YOu might say that we kept going down until March of 2009, but we were still unwinding the leverage in the system. Since March 2009, we have gone from about 6,500 on the Dow to about 10,800.
In summary, since interest rates are already at zero, the Fed’s only real bullet left in the chamber is asset purchases. You may hear the term “quantitative easing” or “monetizing the debt”, but the intent is to get the economy moving forward. What is the risk in continuing to not “Fight the Fed”? At some point, the Fed could run out of bullets.
Have a nice day everyone.
