By Paolo von Schirach
July 11, 2013
WASHINGTON – No, America, the Fed is not going to remove the highly spiked punch bowl from the party. You misunderstood. In truth, Fed Chairman Ben Bernanake clumsily said something about slowly ending QE3, this way getting everybody scared that the Central Bank induced festivities would soon be over. But, no, he did not really mean it. On the contrary, he just said that the US economy still needs “highly accomodative policies” for the foreseeable future. Got that? Not just “somewhat accomodative polices”. No, Mr. Investor, America needs “highly accomodative policies” which means zero per cent interest rates for quite a long time.
The party will continue
After hearing the latest from Bernanake, the Wall Street crowd cheered. The stock market shot up. The dollar went down, to the delight of US exporters trying to compete with the equally “highly accomodative policies” of Bernanake’s counterparts in Europe and elsewhere, including accomodation on steroids now pursued by the Bank of Japan.
So, here is the new “rephrased” message. The Fed will not change its course, because the US economy, despite some improvements, is still too weak. Unemployment at 7.6% is too high, growth below 2% is modest, and inflation is not a problem.
Fed moves markets
It is amazing how a US Central Banker, a man who makes about US $ 200,000 a year, (yes this is the ridiculously low salary of the Fed Chairman), with just a few words can move hundreds of billion in and out of stocks, bonds and currencies.
It is amazing, and also not at all good. Capitalism should be based on market forces that should help all players discover the real value and therefore the appropriate market price of all assets, at the same time allowing for realistic risk evaluation.
Interference is not good: you get fake numbers
As long as Central Bankers keep interfering with the fundamentals, investors will not know the real value of anything. And, what is worse, as of a few years Central Bankers interference is the established “New Normal”. Once upon a time the Fed would act may be once a year in a fashion that would move markets. But we have been living in a Fed induced market place since the Great Recession of 2008.
Today we are experiencing the consequences of the latest Fed pronouncement. As interest rates will stay low, stocks will continue to benefit from a Bernanke premium. To the extent that interest on US 10 year bonds will adjust down, US borrowers will get the added benefit of lower interest rates on their new mortgages, this way boosting the entire US housing market.
The plain truth is however that the real economy is not performing as well as an all time stock market would indicate. Just like all those records broken a few years ago by baseball players on steroids, all this Wall Street froth is mostly fake stuff.