David Rosenberg on the folly of investing in this market and faith in the Fed:
This is a market completely based on hope. Throw fundamental investment principles out the window. It’s now all about how the Fed can manage to inflate asset prices now that fiscal policy has tested its limits with the voting public. But where does this renewed faith in the Fed come from? Is this not the same Fed that took the funds rate from 5.5% to near- zero? The same Fed that tripled the size of its balance sheet in QE1? The same Fed that thought the housing and mortgage crisis would stay “contained” back in 2007? The same Fed that confused a credit contraction with a liquidity squeeze? The same Fed that believed, in the summer of 2007 when the crisis first broke that we would see 2.5-3.0% real GDP growth in 2008? The same Fed that was contemplating its exit strategy just a short six-months ago and believed it could start to shrink its balance sheet last spring? The same Fed that investors have so much faith in, and is the same Fed that passively tightened policy with a 25 basis point hike in the discount rate to 0.75% back on February 19th. The same Fed that just trimmed its forecast three times in the past four months, and is this not the same Fed that investors now have “faith” in? The question is, the “faith” to do what?
I thank you for your kind response to my comment. Your analogy is very funny but unfortunately accurate. We in Canada have experienced a weak loonie for at least two decades now (my entire Canadian experience). So some of us up here have considerable experience playing this cross-border exchange. So while all fiat currency is bad, they are not all equally so, for every country has banking policies and government deficits that vary from stupid to insane. While they are all stupid, the US federal government is insanely accelerating the total collapse of the currency. That is why I have, living in Canada, a 100% stock portfolio with only Canadian equities, and borrowing against my US-denominated margin account to build up my holdings in resource-rich Canada; it is a strategy that is working handsomely so far. In two years, who knows? The NDP may come to power in Canada and all bets are off. Cheers.
I don’t think Rosenberg is viewing this the right way. It is not “faith” in the belief of the dependability of the Fed. It is rather the view that the Fed will expand the money supply as has been its wont and as it has promised to do again some more, not just a little bit. So I think that Marc Faber, who has said get out of bonds and cash and that stocks are better. I don’t think it is right that the Fed wants to create inflation, but I am pessimistic enough now to belief that we have not seen the end of QE, not by a long shot. I’m shorting the dollar. That will be my investment plan until I hear Bernanke say that he is going to have to shrink the money supply, yet I will find it hard to believe until he has raised interest rates by a minimum of 3 basis points. But as long as he is saying that he’s going to increase the money supply, I’m going to take him at his word.
P. W.
There are doubts that the Fed can do anything correct based on past performance. I agree with you that they intend to inflate. Actually, I have argued that QE would continue even if the economy were healthy because the government cannot pay its bills via tax revenues and market-based debt sales.
I agree that the dollar is likely to be destroyed, but I don’t like shorting the dollar against other currencies because their values are also moving down. As I analogized elsewhere, playing one currency against another is like betting on particles floating in a septic tank. Sometimes one is up and sometimes the other. But we all know what a septic tank contains.
Monty