Please watch the video above. Now picture Ben Bernanke, with shades, singing the exact same tune to his compatriots at the Fed. Can't you see it, "Know it sounds funny but I just can't stand the pain, that's why I'm easy..."
So the Fed has surveyed our economic landscape and found it to be unsuitable for growth, therefore they are launching QE3. It seems that they believe since QE1, QE2, and TWIST haven't been able to reinvigorate economic growth, QE3 should do the trick. The Feds biggest issue is the stubbornly high unemployment rate. Not just the 8.1% headline rate, but the full U6 unemployment rate of 14.7%. Basically, the Fed said that they don't see the economy growing at a fast enough rate to substantially lower unemployment unless they intervene in the markets. And intervene in a massive way.
The highlights of QE3, or more aptly QEfinity:
The Fed will buy $40 billion per month of agency mortgage backed securities. They will also continue TWIST, their $45 billion monthly purchase of long-term treasuries. So the Fed will spend$85 billion per month buying long-term securities!
The Fed also said that they expect to keep interest rates at ZERO until mid-2015.
One of the major differences in this announcement is that the purchases are open-ended...they will continue until unemployment improves substantially, or until the patient dies.
To QEfinity and Beyond - The Fed is boldly going where no central bank has gone before. Chairman Bernanke clearly stated that he is trying to blow bubbles in risk assets. He is trying to reflate the housing market so homeowners will feel wealthier. He is trying to inflate the stock market so shareholders will feel wealthier. He is trying to force investors off of the sidelines. His stated belief is that if he can make wealthier people feel even more wealthy, than they will spend more freely, and eventually this will lead to job growth. Financial repression continues.
Collateral damage - Savers will be robbed for the benefit of debtors. Millions of retirees, pension plans, and foundations will receive negligible returns on their lower risk fixed income. Inflation will raise its ugly head. Rents will rise. Commodities, especially gold and oil, will rise. The value of the dollar will fall. The average unemployed American will be faced with a rising cost of living while he waits for that hoped for job offer.
We are in a full-fledged currency devaluation war. In response to the Fed's action Japanese financial minister Azumi said," I will not rule out any measures and I will take decisive steps when it is deemed necessary." While the ECB has said they will print as much as the Germans can bear.
Chairman Bernanke believes that he has a mandate to do whatever possible to lower the unemployment rate. Unfortunately, monetary policy is not always effective in lowering unemployment. Our current ongoing unemployment dilemma is not a result of tight monetary policies (policies have been extremely loose for years). No, our current unemployment plight is the result of a government (both parties) over-regulating, over-taxing, and misallocating capital, for decades. I feel for Ben, he's using the only tool he has, unfortunately it's the wrong tool. "I wanna be high, so high. I wanna be free to know the things I do are right."
OK, enough pontificating on whether or not this is the right strategy, I'm paid to manage money...period.
Where We Stand:
At Rockhaven our philosophy is to stay in harmony with the markets, and right now those markets are clearly moving into risk-on mode. The reason doesn't matter as much as the reality.
Here is how our three strategies were positioned as of September 1st:
Our more balanced Global Tactical Asset Allocation (GTAA) had about a 15% allocation to cash and a 10% allocation to Treasury bonds at the beginning of the month. With the Feds recent moves, and the subsequent moves in the markets, we would expect to see those allocations reduced; while the allocations to gold, commodities, and stocks increases.
Our Focused Tactical Asset Allocation (FTAA) is already positioned to take advantage of the Fed's voyage into uncharted waters. The portfolio is ideally positioned for a yield hungry, inflationary environment. REITs, both US & International, are at a 40% weight, Master Limited Partnerships are at 20%, and commodities are at 20%. I would expect Gold to replace either Bonds or TIPS in the near future.
Our diversified tactical high-yield portfolio is weighted in all the areas where the Fed is chasing investors, yield and risk. The portfolios current yield is approximately 6.5%.
So this is where we stand, our heart and head tell us the Fed's strategy of open-ended easing will not be effective in substantially lowering unemployment, but it will be effective in inflating bubbles in risk assets. It is not an "All Clear" signal based on the long-term fundamental strength of the US economy, it is a "Temporary, Central Bank Orchestrated All Clear" that may or may not lead to economic strength. The big risk is rapid inflation and currency devaluation. Participate, but be wary of the risks!
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