The Fed and the Ides of March? Beware?

The Fed is meeting on the Ides of March?  Whoa mama… Look out.  I don’t know how much more clear Ben Bernanke can be that he has no plans to alter the zero bound of interest rates at any time in the near future.  The question on everyone’s mind is what will happen with ZIRP+, otherwise known as QE2.  One camp thinks that the Fed will withdraw its support of the fixed income markets, as a result of the improved economic situation.  Bernanke is in a bit of a quandary because although he wants to put on a good face and pretend that everything has been fixed, I think he knows that’s not really the case.  Thus, the other camp thinks that the Fed will have to continue buying bonds, supporting asset prices and trying to (continue to) force capital into risk assets.  I tend to lean toward the latter camp.

Could the Fed stop QE and then re-start it if things turn sour?  I am skeptical that they could pull that off, as I think it would make them look like incompetent buffoons who were behind the curve and had no idea what they were doing.  On the other hand, perhaps it would be possible, under the reasoning: “See, we told you QE was working – look what happened when we stopped!”

Today, Dealbreaker had a quote from Alan Greenspan which led me to read his most recent ramblings:

“I conclude that the current government activism is hampering what should be a broad based robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.”

I was puzzled because I felt like, in my mind, Greenspan’s quote should have another few words at the end of it, so that it would read:

“I conclude that the current government activism is hampering what should be a broad based robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market, which is a result of current government activism,”

but of course then you end up in a never ending circular loop of catch-22 reasoning.  So I read Greenspan’s full piece, and found something that I very much agree with:

“Speculators, to be effective, have to believe they are able to judge oversold markets. But unpredictable discretionary government intervention scrambles the prospective underlying supply–demand balance. Speculators, who might add support to a market when it is weakest and hence when their buying is most risky, lose their perspective and withdraw to the sidelines. The mere uncertainty of when, and to what extent, government might intervene raises risk enough to thwart much desirable speculative support for markets.”

In layman’s terms, I’d rephrase this as:

“We speculators don’t want to step in and buy stocks because we don’t know if the recovery is real, of if it’s just a temporary illusion as a result of Government intervention in various sectors of the economy.  Furthermore, we don’t know when such Government policies will end, and thus it makes it even harder to jump on board and try to ride the Uncle Sam train, even if that’s what we want to do (as Bill Gross said famously a long time ago: “shake hands with the Government.””)

I think it’s essential to note that, in my opinion, Greenspan’s description of the current market attitude of speculators also applies to MOST American investors – not just guys slinging futures and options on the floor of the Merc.  We’re all speculators, after all.

-KD

 

Kid Dynamite is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Kiddynamitesworld Blog