All eyes were on Ben Bernanke and his financial puppeteers at the Federal Reserve this week, as they gave their first ever press conference which would “hopefully” give us some insight into the economy. They quickly reiterated their persistent message that the economy was on firm footing, that they were not going to do any further stimulus programs…and then promptly initiated another stimulus program, but without a name!
What Helicopter Ben came up with was to let QE2 run out in June but to use the proceeds from these existing bonds to buy more bonds. Even more importantly was that they kept the language in their statement about keeping interest rates at zero for as long as the eye can see. Hmmm, sure sounds like QE3 to me…which is exactly what I have been expecting and had the opportunity to discuss on CNBC (view clip) yesterday morning before the outcome was announced.
This is clear evidence that the Fed sees more risk in the economy than they are telling us, and feel the threat of a recession and deflation is far greater than inflation. After all, stimulus is not needed if the economy is in good shape. This was confirmed this morning when the Commerce Department reported that US Q1 GDP grew at a less than expected 1.8% pace, below the market’s forecast of a 2.0% gain and last quarter’s 3.1% pace. $14 Trillion in stimulus and this is all we can come up with? Clearly the economy would sag without it. Worse off is that each time it has less of an affect.
The good news is that the economy is at peak performance. U.S. productivity, measured as employee output per hour, rose 3.9 percent last year, the most since 2002, according to Labor Department statistics released in March. Labor costs fell 1.5 percent following a 1.6 percent decrease in 2009, the first. Going forward, companies will have a harder time cutting costs and working labor harder to increase productivity. Sales are going to have to increase dramatically. Unfortunately, with an over indebted populace, an aging baby boomer, rising inflation and tremendous unemployment, that is just not likely.
Continued stimulus… or quantitative easing…or….whatever horses name you want to place on it, is clearly good news for the stock market which is absolutely addicted to the stimulus like a crack addict is to crack, or what I first deemed The Great Viagra Market. Keep the free money flowing baby, and the market will stay firm. Sometime soon the benefits will dissipate where all you get is inflation but with little growth, otherwise known as stagflation. Therefore, they are eventually going to have to let the economy find it’s natural equilibrium and alleviate the massive debt bubble. When that happens, all hell will break loose again. Therefore, investors must be active and nimble enough to take what the market gives you in the interim, but prepared with a personal exit strategy.
That’s where we can help. Our active hands-on approach to managing portfolios can help you manage risk and deliver returns. If you would like to discuss the market, economy or simply get a free second opinion on your portfolio, call me for a free consultation today at (916) 925-8900.