1) During the 2008 financial crisis, the Federal Reserve stepped in to provide liquidity and took measures to possibly prevent the US from experiencing its worst depression since the 1930s. Whether we agree with what they did is not the point. In their view, the Fed did what they had to do to keep the banking system from collapsing and to help the economy get back on its feet again.
2) Now, in 2014, many say that the economy has improved and the Fed should step aside. In other words, they no longer need to help with liquidity, they should stop all their bond buying, and they should consider raising rates soon. One problem with that thinking is that the health of the economy is measured by 50 different reports. There is no question that some parts of the economy have improved and stabilized, but there are other parts that are still fragile (specifically wage growth, housing, and the retail sector).
3) Here’s my crazy prediction: Not only will the Fed NOT raise rates anytime soon, but they will possibly start another version of QE (quantitative easing) again. The easing might not be the exact bond buying program as QE3, but it will be some variation of easing. Remember, the Fed has many different weapons at their disposal. They could announce or hint at their next version of easing as soon as this week (at the Jackson Hole Symposium Aug 21-23) or at one of their next two Fed Meetings (Sept 17 or Oct 29).
4) Part of my reasoning for this prediction is political. The problem is many people are WAY TOO sensitive about politics, so I won’t get into the details. Let’s just say that the powers that be are not going to come this far and not fully execute their plan (which is to make sure the economy is 100% back on its feet, which it’s NOT right now). Many say the Fed is usually late to act. In this case, I think the Fed would prefer to be late than to raise rates too soon (as they did in 1937) and possibly send the economy back into recession. In addition, the Treasury would be completely screwed if the Fed raised rates, but that’s a whole different story.
5) For those of you who think I’m blindly bullish and I just want the stock market to go higher, you are 100% incorrect. I know this all ends badly, it always does! The problem is I think this uptrend could go on for much longer than people expect, partially due to the continued accommodative environment. As I’ve said for many years, who cares! Just take advantage of this liquidity-driven market and when the warning signs appear, reduce your exposure. For all we know, the Fed has been buying bonds all along without telling us. After all, they are their own separate entity and are they required to notify us of EVERYTHING they do?
One final note, if my crazy prediction comes true, you will see many on Wall Street absolutely furious! Just remember, the only people that are REALLY complaining are those who are NOT making money…because no one I know doing well in the stock market really cares about any of this.
I can be reached at: jfahmy@zorcapital.com.
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