The whole article is well worth a read (click on post title for a link)...QE expectations...
"...My impression is that Ben Bernanke has little sense of the damage he is about to provoke. A central banker who talks about throwing money from helicopters is not only arrogant but foolish. Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency..."
Market Climate
As of last week, the Market Climate for stocks was characterized by unfavorable valuations, unfavorable market action, and unfavorable economic pressures. I've noted for weeks that the damage to market action was not quite to the level that would create urgent downside concerns. However, the deterioration we observed last week suggests a more urgent shift to defensive positioning. For our part, the Strategic Growth Fund remains fully hedged at present.
In bonds, the Market Climate was characterized last week by unfavorable yield levels but favorable yield pressures. Treasury securities have advanced sharply on the initial quantitative easing purchases by the Fed. Meanwhile, the jump in unemployment claims to 500,000 and the surprising drop in the Philadelphia Fed index are both consistent with the weakening economic conditions that are clearly implied by leading measures. If anything, those deteriorations appear to be early, not late-stage observations. As I've noted regularly in recent commentaries, normal lead-times would suggest a deterioration in the ISM Purchasing Managers Index in the August-September data, while new claims for unemployment typically have an even longer lag, which would normally make us expect strains closer to October. Suffice it to say that the much earlier deterioration in economic measures is not encouraging, but it also opens up the possibility that we may see some misleading "improvement" in the data in the next few weeks before we get into the more typical window of deterioration.
As one might infer from the content of this week's remarks, my view is that the quick initiation of quantitative easing by the Federal Reserve has significantly changed the prospects for foreign currencies and by extension, precious metals. For the past couple of months, I've observed that deflation risks in response to fresh economic weakness were likely to provoke weakness in the commodity area, even if long-term inflationary concerns were accurate. However, my impression is that the Fed's immediate initiation of quantitative easing may cause investors to take deflation concerns "off the table." This is important, because even as we observe economic deterioration, the potential for a "deflationary scare" is likely to be more muted than we might have expected without explicit quantitative easing actions.
This doesn't entirely remove those risks, of course, particularly if we begin to observe a spike in credit spreads (which would be associated with default concerns and a likely drop in monetary velocity), but it clearly changes the environment. Gold stocks and the XAU have essentially gone nowhere since May. Last week, in response to a favorable shift in the Market Climate for precious metals and currencies (largely resulting from the shift in Fed policy and interest rates), we increased our exposure to precious metals in the Strategic Total Return Fund toward 10% of assets, and raised our exposure to foreign currencies to about 5% of assets. This is still not an aggressive stance, and we would prefer the opportunity to accumulate a larger exposure on substantial price weakness, if it occurs. But as this week's comment makes clear, the Federal Reserve has begun to play with fire, the effects of which I doubt Bernanke fully appreciates.
Good policy is not rocket science. It begins with the refusal to make people pay for mistakes that are not their own. This economy continues to struggle with a fundamental problem, which is that debt obligations exceed the ability to service them. While policy makers have done everything to preserve the patterns of spending and consumption that created the problem in the first place, we have done nothing to restructure those obligations.
To the extent that we observe fresh credit problems, we should not pursue the same policies. Instead, we should focus on restructuring debt. Let the bank bondholders fail, and defend depositors and customers through the standard procedures that the FDIC has followed for decades. Deal with the debt of Fannie Mae and Freddie Mac by asserting that there is no explicit government guarantee, and let the holders of the mortgage pools receive precisely what they are entitled to receive without public funds. At the same time, expand the role of the FHA to provide explicit government guarantees for future mortgages in return for actuarily fair risk-based premiums, and require mortgage originators to retain a piece of the mortgage loan, along with appropriate capital requirements, and the stipulation that this retained portion bears the first loss if the mortgage goes bad. Finally, refuse to trot self-interested bank and Wall Street executives in front of the public to extort the nation through fear of the word "failure." Banks fail all the time and customers don't lose a cent. The only implication of failure is that stock and bondholders of reckless institutions aren't rewarded for their malinvestment at public expense.
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