I wrote last week that, in my humble opinion, the Fed's intention to keep rates at "exceptionally low levels" for a length of time that surprised just about everyone, was aimed primarily at helping to build confidence in the American economy. Bernanke appears to have learned that when consumers are confident, they buy more stuff. And when more stuff gets bought, companies tend to hire more people. And when companies hire more people, everybody is happy.
Although there are those that fear Bernanke & Co. see something in the economic data the rest of us don't, I'm of the mind that the Fed chairman's fear of a deflationary spiral is another big part of the equation here. So, another thing the FOMC has learned is that if you push rates down far enough, the prices of things like oil, gold, steel, and just about all other commodities for that matter, tend to rise. As do stock prices. And since higher stock prices tend to lead to higher confidence, well, you get the idea.
As an investor, this is all good news. One of the oldest Wall Street rules is "Don't fight the Fed," to which I have added the words "especially when they are on a mission." The bottom line here is if Ben Bernanke is hell bent to create some inflation so that home prices can perhaps inch up a little or that stock prices can move higher, then who are we to say it's a bad idea?
The question though is what will be the cost of the Fed's newly extended ZIRP (zero interest rate policy)? While some improvement in home prices and a rally in stocks certainly both sound like great ideas to homeowners and investors, the problem is there is a cost. And put simply, that cost is higher prices for consumers, which, of course, can ruin the mood.
It is important to keep in mind that the Fed is at least partially responsible for the problems that created the massive declines seen in stocks and home prices during the 2007-08 debacle. Remember, it was generationally low interest rates that caused investors around the globe to search for higher yield - and to take on higher risks. So, the idea that the Fed is planning to keep rates at zero percent for three more years is more than a little disconcerting.
Assuming no new bubbles build that could threaten the U.S. economy and/or our banking system, the real problem with the current Bernanke plan is it hurts American consumers and savers. While, the Fed's economists can point to their data and say with confidence that inflation is not a threat, in reality, when the cost of "stuff" like grains, coffee, and steel increase, consumers feel the pinch.
The problem here is that the government's definition of inflation is heavily weighted toward wages. And the bottom line is that wages aren't going up due to the high rate of unemployment. So, Bernanke & Co. know that they can try to boost confidence and in turn, economic activity, by continuing their easy money policy (and maybe even another round of QE just for good measure) without worrying about inflation - well, on paper anyway.
If (a big if) the Fed's plan works, then consumers will regain their confidence and resume their free spending ways. And as a result, the economy might finally get back on track to stay. So, a little commodity inflation is worth it, right?
But think back to what was happening to prices at the gas pump and at the grocery store before Europe became the focal point of the markets. If you will recall, gas prices were pushing the comfort zone and there were riots in the streets around the world due to spiking food prices. A spike that was sponsored by a little something called quantitative easing.
So, while I completely understand the Fed's fear of a Japanese-style deflationary spiral and I get that a little confidence might go an awfully long way in generating some economic growth; I remain concerned about the cost of such a plan.
But as investors, we should probably just put our fears aside and buy the stuff that goes up when the Fed wants inflation and enjoy the ride. After all, we might need the money.
Turning to this morning ... Stock futures are pointing higher in the early going on the back of the new fiscal compact getting done in Europe as well as a report out of China that the government may encourage local Chinese pension funds to invest a portion of their capital in equities.
On the Economic front ... We'll get reports on the Case-Shiller Home Price Indices, the Chicago Purchasing Managers Index, and Consumer Confidence later this morning.
- Major Foreign Markets:
- Australia: -0.20%
- Shanghai: +0.33%
- Hong Kong: +1.14%
- Japan: +0.11%
- France: +1.54%
- Germany: +1.05%
- Italy: +1.51%
- Spain: +0.55%
- London: +0.76%
- Crude Oil Futures: +$1.11 to $99.89
- Gold: +$10.80 to $1745.20
- Dollar: lower against the yen, pound and euro
- 10-Year Bond Yield: Currently trading at 1.851%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +6.00
- Dow Jones Industrial Average: +50
- NASDAQ Composite: +9.87
