Sunday, May 26, 2013

Bernanke's Best QE Exit Strategy!

After much thought I have arrived at an exit strategy that will work for the Fed Chairman. It will both preserve his legacy in history as well as help insulate him from criticism. All the recent speculation over the President's second term and how he will be remembered has called attention to the importance of "legacy" to many in high office and people filled with feelings of self-importance. So what becomes the logical way forward? As Bernanke nears the end of his term, this would be a "crazy good time" to leave. I would suggest he continues for the last several months with more of the same, supporting the market that has supported him, right or wrong.

If the goal is to continue until the unemployment problem abates, the Fed will never stop or dial back on QE, the economy is totally dependent on the props and cheap easy money that flows from the Fed. Thus the only way out of the trap he has built is to hand off the office and program to someone else. The second part of this exit strategy is to run or distance himself from the blow-back and negative implications of his disastrous policies and let the blame fall on those that follow. After years of market manipulation he and the group that have learned to control the direction of the market are masters, even if dark storms begin to gather, a few more days or weeks of keeping the balls in the air while difficult should not be impossible.

Future downturns can be blamed on any of the many forces and headwind that lay before us. Even Bernanke has called the recovery fragile. Remember this is the same Fed Chairman that totally missed all the signs of a forming housing bubble in 2006. While his image is still intact and he is bathing in the spotlight as a hero and savior of the world economy his ego has grown even larger then the quantities of money he has added to the Fed's balance sheet, now by declaring "mission accomplished" and taking a fast victory lap he can remain in history and in the eyes of the public as the man who got us through these tough economic times. This can be topped off with a lucrative book deal, being paid to speck at economic forums, giving commence speeches at Ivy League colleges and all the other benefits of his connections.  Like those before him we need not worry about his economic future.

Several long time and well respected investors like Pimco’s Bill Gross agree with Jermey Grantham’s long-term macro prediction that bond investors should be expecting 2% to 3% returns over the future years, lower than expected. Moreover, a big spike in interest rates  wouldn’t be friendly for stocks either. Grantham warns that from the late 1900s until the early 1980s “the trend for U.S. GDP growth was up ... remarkable ... 3.4% a year for a full hundred years,” powering the American Dream. But after 1980, under Reaganomics and the new conservative capitalism, “the trend began to slip”. After a century of high-growth prosperity, our GDP growth dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.”

And looking ahead at long-term macro-trends: “The US GDP growth rate that we have become accustomed to for over a hundred years” is “not going back to the glory days of the US GDP growth,” no matter how much wishful thinking the media quotes from in-house economists at UBS and Wall Street banks. It is gone forever, we are in denial about the amount of future growth we can expect, the stock market is involved in a bout of “irrational enthusiasm”. Most business people, bank economists, and the Fed assume that economic growth will recover to its old rates, but demographics would indicate otherwise. Looking ahead to 2050, Grantham warns: “GDP growth for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.” If  fellas like Gross and Grantham are correct it will be tough sledding ahead.

Footnote;  For more on this subject please view the post below,


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