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Independent Financial Advisor / Professional Investor- with over 25 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Fed, Tapering , Your Portfolio - Part 2 2 comments
    Aug 21, 2013 3:31 PM

    My initial commentary on the topic of the Fed and the winding down of QE can be found here.. http://seekingalpha.com/instablog/706857-fear-greedtrader/2142562-fed-tapering-your-portfolio-an-overview

    There will be no shortage of commentary on this topic as the markets now come to grips with the process of "rate normalization". More importantly there will also be no shortage of market reaction in the terms of volatility as we go forward. I expect plenty of "overreaction" as most will follow the typical "knee jerk" reaction that often shows up in these types of situations. I suggest that all remain calm, If you have followed along in taking profits along the way and have raised some cash, there will be plenty of opportunities presented to reap more gains in equities.

    Here is what has been stated by Bernanke and other fed officials regarding the initial steps of winding down this program. "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy - an effort to preserve flexibility and manage highly unpredictable market expectations. They plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated."

    I was reminded this morning listening to commentary on this topic, and have come to realize that the Fed has never used the word "taper".

    I assume that buzzword is a product of the media and other sources The words as stated by Bernanke , clearly indicate that they will use steps to determine exactly how much and when they slow down purchases. The common belief now is that once the Fed starts to "taper" , it will be a straight line down with the eventual result being no more asset purchases. I totally disagree with that premise. I base my counter argument on what the Fed has stated and I will provide more to support that argument when i lay out what is being touted as possible negative scenarios.

    Another misconception that has already taken hold is that a rate hike is imminent. I have argued that tapering is not 'tightening" . Anyone that wishes to argue that can take a look at the Fed's statements as they relate to their Zero Interest rate policy (ZIRP). The objectives are very clear when it comes to raising rates.

    As this is played out I can see the following results as overall market reactions as the "End of the QE 'trade" unfolds:

    First, a stronger dollar, which will translate to watch the action in commodities as I believe it will be "sloppy"..

    Gold will sink , trading much lower than it is today. Stocks will re-correlate to this new environment. Contrary to some opinion, equities can do quite well once the market "adjusts" to a more normalized interest environment. . We can also expect increased volatility (elevated VIX levels).

    I believe this is how the "anticipation phase" will look, and this environment can unfold in a longer period of time than most imagine. Months , A year ? who knows ? We have never been down this road , its unprecedented , so I'm not going to pretend to have that answer. Frankly speaking, no one does. That uncertainty will also impact the markets.

    Now here are two negative scenarios that are talked about - and I don't believe that either of these potential outcomes will occur, but you will hear plenty of "noise" about them in the coming weeks, months.

    Scenario 1 is a sharp and sudden bond-backup, like we witnessed in 1994. That will jar corporate America as borrowing rates spike followed by a very negative reaction in the stock market. My answer: Do we really believe the Fed would have gone to all this trouble just to orchestrate a pile-up during the exit. Very unlikely , its not happening .

    The second scene involves a ceaseless rate hiking campaign, similar to what Greenspan did after the 2003 economic recovery - seventeen consecutive 25 basis point hikes without giving the earlier hikes enough time to work their influence on the system.

    The Bernanke regime has been non-traditional in so many ways, why should we expect to see that type of "programmed" tactic employed that is oblivious to results so linear and relentless. Again , my belief is that it wont play out that way.

    Markets have a predictable way of adjusting to "regime change" - there is violence, turmoil at first, then "stops" & "starts" as new information induces re-ratings and reconsiderations among all of the market participants. It is only when the discounting process is complete, there is calm again.

    Unlike many others, I have some faith in the present Fed and its leader Mr.Bernanke. Others wildly disagree and blame the fed for everything from monetary policy to climate change !

    Maybe we need to take a "middle of the road" approach and look at some facts to ease the "negative" concerns that are bandied about.

    Bernanke is a student of the Depression" , he has often referred to a period in 1937-38 or what economic historians refer to as "Roosevelt's Recession". A period where the Fed's tightening policies were supposed to help that economy rebound after it had fallen back and was mired in pre '29 crash levels. Instead recession ensued. Believe what you wish about Ben , from what I have witnessed so far, Bernanke is not going to be pushed into repeating that mistake.

    Furthermore, the Fed has a literal army of Phd's , analyzing the data with all of the "timing" concerns for this "exit" that trouble the markets. Now, I find it amazing how so many experts come out to tell us how the Fed has made mistake after mistake and have painted themselves into a 'corner" with their policies. I simply answer that their argument is pure nonsense. They would also have one believe that the entire cast of central bankers around the globe also do not know what they are doing. Now somehow they want us to believe "they" have the answers. In one word that's "absurd". They have been wrong for years now , I for one choose not to follow any of that "advice" now. After all they have proclaimed al of the market rally as an "illusion" , created by the Fed. The bottom line profits we have garnered from one of the strongest rallies in History are hardly an "Illusion"

    Simply put, the current zero interest rate policy (ZIRP) and the various quantitative easings will be dismantled and undone as slowly and deliberately as they were put on. Volatility for sure, but stay the course, keep a calm head, and opportunities will abound in the equity markets as we move forward.

    Stay Tuned

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long numerous equity positions , full disclosure here in my blog , I am short gold via DZZstocks4income@usa.com

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Comments (2)
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  • John Wilson
    , contributor
    Comments (2060) | Send Message
    Fear - though I am not a Fed fan, I agree.


    "Unprecedented" is a very apt description of the situation the Government and Fed have found themselves.


    It seems that the Fed and Congress are at cross-purposes with each other. The Fed is trying to manage the huge overhanging debt while the government (Congress & president) keep adding to it. The fiscal year has just ended (Sept 30) and the financial press was very satisfied that the deficit spending was held to under $1 trillion in 2013. (we now feel that's frugality?)


    Even though I do not like the Fed as an institution, I agree that it should not be blamed for for all our financial problems. I look to the fiscal (govt spending) side where the trillion dollar deficits are occurring. The Fed will not be able to enable the government spending forever.


    The Fed also cannot successfully stimulate the economy and create jobs while government policies are destroying jobs through Obamacare.


    I think that it is first of all a government spending problem. The Fed will just not be able to enable this spending and debt indefinitely.
    1 Nov 2013, 12:46 AM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10760) | Send Message
    Author’s reply » John,


    Thanks for the comment , couldn't agree more, the problems we face lies squarely at the doorstep of congress and the white house ..
    1 Nov 2013, 08:27 AM Reply Like
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