The Fed -- Uneven Accomodation
In recent years, the Fed has provided roughly $2 tril. of liquidity to an economy that was sorely
in need of it. The process has been uneven to say the least. The first surge of more than $1 tril.
came during the latter part of 2008. The Fed then withdrew $400 bil. at the begininning of 2009,
which resulted in the final tanking of the bear market in stocks in early 2009. Then, the Fed went
on another tear, adding nearly $550 bil. to the system through mid - May 2010 (QE1). the next
program -- QE2 -- injected nearly $600 bil. into the system over the 11/10 - 6/11 time frame.
The Fed then added another $100 bil. dollop in currency swaps in late 2011.
Economy -- Surges & Stalls
The economic recovery has roughly followed the path of the Fed's liquidity addition programs.
Over late 2009 - present, my cyclical pressure gauges have been strongest over the Q4 / Q1
intervals and weaker over the Q2 / Q3 periods when quantitative easing has been on hold. We
are now in an interval when QE is on hold.
Stock Market -- Deep Corrections In A Cyclical Bull
The steep market corrections came during Q2 / Q3 in both 2010 and 2011 as leading economic measures and cycle pressure gauges faltered. Fresh QE rescued the market in both latter 2010
and 2011 with positive carryovers into the new year.
Bonus Times For The Bears
In both 2010 and last year, flare ups over weak sovereign credits in the EU periphery became
acute over the Q2 / Q3 intervals. It's Q2 2012, and Spain, with its addled banking system and
generally weak private sector credit situation is steaming into view.
My cycle pressure gauges and forward looking indicators have eased some after a strong start
to the year. QE is in abeyance and the EU's economic discontents can resurface in warmer spring
weather when folks find it more congenial to take to the streets. Private sector credit demand in
the US is continuing to recover but may not be quite strong enough yet to fully underwrite further
economic recovery. Given how economic and investor confidence seem to reflect the status
of QE activity, another Q2 / Q3 stock market swoon cannot be discounted. The market is now
overbought, so a 5-7% decline could come along and be normal. When I say "swoon", I have in
mind the much deeper corrections experienced over the past two years.
Crystal ball gazing is not my forte. I would not argue with anyone who foresees a normal,
moderate price correction ahead, and I hope we do not get another large corrective dip. In the meanwhile, I may well be stuck for another six months with having my core fundamental
indicators still positive and with a continuing cyclical bull market call still on the table even
if the "risk off" siren calls get loud.
How about more QE? Fed chair Bernanke would take a lot of political heat and criticism if
he went ahead with further QE if the economic recovery started to flounder. But, if I read him
right, I doubt he would hesitate and I think he could get the votes from the board. I also think
the Fed would dearly like to avoid another splashy program if It possibly can. By the way, if
another QE round becomes an issue soon, you know Obama will be in Ben's corner.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!