A decade ago, Fed Chairman Ben Bernanke honored Anna Schwartz, co-author of A Monetary History of the United States as one of the most knowledgeable monetary historians of our era. In an interview shortly before she died, Schwartz indicated she didn't feel the same way about Bernanke: "my verdict on this present Fed leadership is that they have not really done their job." The problem according to Schwartz is that Bernanke is "fighting the last war" with his ultra-accommodative easing. Let's see what she meant by that.
The graph below shows the effect of QE and "Operation Twist" on the ratio of civilians employed in the U.S. economy. If QE was the right solution for the Great Depression, which Bernanke studied so extensively, it isn't doing much for the current situation.
The ostensible purpose of QE has been to boost employment, which it has clearly failed to do. The employment ratio remains solidly below where it was in mid-2009, when the recession ended. Unfortunately, no reporter at the press conference was bold enough to ask Bernanke the most obvious question: "If QE is the right policy and the answer to our economic problems, why is it still needed after four years?"
The honest answer is it hasn't worked after four years of trying and the only reason to continue is faith that at some point it might still work. This faith is based on the notion that somehow, if the Fed can just manage to generate a little inflation, that will give the economy stimulus and kick-start job growth.
The problem is the academic literature doesn't support this notion. A recent study by Harvard economist Robert Barro indicates that, if anything, inflation actually has a negative effect on real growth. And it certainly has a negative impact on living standards. As I showed in this article, it has also had an inverse relationship with growth in payrolls since the late 1960s.
What to Do...
While they haven't done anything for employment, the Fed's ongoing QE efforts continue to bolster markets. The tough question is when will the Fed face the reality shown in the graph above -- that QE has done little beyond enriching banks and wealthy investors? Bernanke's press conference Wednesday suggests that may be a ways off. But when it does happen, we can expect an epic rush for the exits.
Foreign investors have increased their Treasury bond holding five-fold in the last ten years. I do not expect these holders to wait for the Fed to declare that it is ending QE, before they begin trimming their holdings.
I'm using the most recent Fed action to boost my short positions on U.S. Treasury bond futures. I may also consider Put on options on the Treasury ETF (TLT). This position may take some patience, but in time, Treasury yields will revert to the mean, which is a lot higher than they are today:
Additional disclosure: I am short 10-year Treasury Futures