Certainly the concept of confusion has been ever present as life here in paradise continues to struggle with the aftermath of Irma. Confusion as well as patience are likely to lead the way as we wait for the return to “normalcy.”
Recently we addressed perhaps the greatest catalyst defining the direction of the economy and the financial markets: the Federal Reserve. Commentary of late has also cast a shadow of doubt as to the future success of Fed actions and their ability to deliver the coveted “soft landing” with regards to interest rates and their ability to influence the direction of the markets.
A recent Associated Press article revealed the startling news that the Fed has been stymied by their inability to accurately predict and evaluate the state of inflation, which is widely considered their primary deciding factor in the direction of interest rates, which in turn can have significant impact on the stock markets. With the recent revelations that the Fed has misjudged inflation, now may be a good time to review the course of events during the last decade to tie it all together.
By now, many are familiar with the concept that we have enjoyed record low interest rates for the better part of the last decade. In fact, the “cheap money” policy implemented by the Fed and their architect of the program, Alan “Mr. Bubbles” Greenspan, led to the greatest dual bubble in modern history — the credit and housing bubbles. As we may recall, this was also a catalyst leading to the great recession which all converged to create one of the greatest stock market crashes in modern history.
In an effort to artificially prop up, the little known strategy known as “artificial stimulus” was implemented in order to give the financial markets time to recover on their own. This policy of printing U.S. treasuries and then buying them back from ourselves was a critical piece of the puzzle by which the Fed planned on buoying the economy during the recovery. Now, what many have called a day of reckoning, recent headlines tell the story of a Federal Reserve now burdened with the plight of eliminating all of the buy-back treasuries out of the system which certainly was never even considered by many on Wall Street as they reveled in the markets rally.
It is worth noting here that this is only one quandary that the Fed is facing. By now, most are familiar with the main tool in the Fed’s tool chest, that being their manipulation of interest rates as the main arrow in their quiver for balancing the markets and the economy. Of course with this comes the fear that at some point rising rates will finally have a negative impact on the stock market if improperly applied. Thus this last year where the Fed has come out and pre-announced the planned rate increases with specific detail as to the timing as well as the amount of increases. This has traditionally been the main concern for many investors as this may be the most critical variable going forward in this new era of stock markets growing to the sky.
Now, fast forward to the most recent AP story whereby the Fed fully admits that “…The Fed is puzzled by the persistence of unusually low inflation and that it may have to adjust the timing of its interest rate policies…Fed Chair Janet Yellen conceded that the Fed may need to adjust its assumptions…” The Fed chair states further that “My colleagues and I may have misjudged the strength of the labor markets…”
So what does all of this mean? Well, for starters this revelation fully puts the overall strength of the economy in question. Furthermore, when we are forced to question the strength of the labor market, and consequently the economy, we then are faced with the very real possibility that the stock market may not be moving based on economic strength. Plainly put, the markets may have been rallying on artificial enthusiasm. As trouble looms with the Fed confusion, certainly the addition of insured portfolios and managed futures can lead to the life of a SWAN, or Sleep Well At Night.
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William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net.