My brokerage is Fidelity, a perceived solid private company that I am pleased with overall, although compared to the race horse that was eTrade, it is a bit clunky. Fido periodically sends out research notes from its fund managers and analysts which I skim and have even gotten ideas from (the successful Japan Small Caps trade noted here via JOF came from some Fidelity analysis on that sector along with my own technical take).
Anyway, here is an excerpt from a note this morning by Jurrien Timmer, Director of Research and co-fund manager @ Fidelity. Note the last line. I don't think I am riddling you if I leave out the answer to the last question. With the Fed on pump 'n pray, you know what I think.
Interest rates: Low for long
Ironically, the threat of contagion could be seen as bullish. Why? Against a background of positive economic momentum, we now have a situation that could cause the Fed to become even looser than it has been.
What made 2009 so positive was the combination of an improving economy and an easy monetary policy. As the expectation mounted that the Fed was eventually going to take away the punchbowl, the bullishness faded.
Now, the Fed may feel it needs to recommit to an easy policy. That could mean renewed asset purchases, and, if necessary, liquidity facilities to prop up the funding markets.
So, instead of the Fed starting to get ready to take the punchbowl away, it may now have to pour even more into the bowl. That could put a whole new lease on life for the U.S. recovery and therefore the asset markets.
Long Term Capital Management redux?
This notion that the Fed is staying loose even though the recovery is continuing reminds me a bit of the 1998 Long Term Capital Management (LTCM) episode. Back then the economy was fine but we had systemic risk in the credit markets (because LT Capital had amassed a trillion-dollar book it couldn't unwind). The Fed responded by cutting rates three times even though the economy was growing. What followed? The dot-com bubble. What could it be this time?