All Eyes on the Fed….Why?

In continuing its asset purchases (QE of US Treasuries and mortgage junk) the FOMC committee seeks to maintain downward pressure on interest rates.”…… Fed Chief, Ben Bernanke, December 2012.

The aforementioned has been one of many “reassuring” statements issued by the Fed over the past four years, encouraging the investing herd, like any drug addict, to get hooked on the Fed’s stimulus policies, the most recent of which is $85 billion a month being pumped into the bond market.

As outlined in the 14th August 2013 blog, “Cash is Trash,” the Fed and/or other Central Bank stimulatory policy wasn’t working, in respect of holding down longer-term interest rates, as was demonstrated with the following chart, which shows the percentage rise in 10-year bond yields:-

weekly_blog_130918_01

 It fact it was never going to work.

Now investors have been on tenterhooks since the 22nd May 2013, when the alpha-dog of Central Bankers, Ben Bernanke, said that he and his fellow board members at the FOMC are poised to start watering down the purity of the drug, better known as tapering. In fact it is expected to commence at today’s FOMC meeting, with the consensus expectation for a $15BN per month withdrawal (if you’ll excuse the pun.)

Just to recap, the Fed has been inflating the supply of dollars at a stunning 33% pa over the past five years, in the process ballooning its balance sheet, so it’s no wonder the herd are lop-sided “Inflationists,” filling their boots with stocks, real estate and gold as a hedge against it.

Has it worked?

As far as the inflation rate is concerned, not at all, as can be seen from the next chart which shows the annual rate of change for US CPI.

weekly_blog_130918_02

Dis-inflation was evident over the period 1980 to 2007, which was good for most asset classes, including commodities during its upwards blip from 2000 to 2008. However, the forces of De-flation caused havoc post 2007 as the weight of debt far outweighed any base money within the financial system.

A glance at the longer term always puts analysis in context.

weekly_blog_130918_03

Just as the hyper stimulus attempt didn’t work, post 1929, it’s not working now. You don’t have to await the Fed’s “tapering announcement” to know the likely outcome of gathering deflationary forces.

It’s all in the charts!

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