The Fed's plan, not etched in stone, is to zero out the QE 3 program by the end of the year.
The tapering process is unique in the annals of the Fed and invites keen observation without
The market decline in Jan. let out pure momentum players and the well - disciplined QE
momentum players. The monetary base will continue to grow substantially over most of
the rest of this year, but % growth momentum of the base measured yr / yr will shrink sharply.
Moreover, the base could go flat month to month late this year or in early 2015 if the Fed
sticks to its plan. If the economy expands as the Fed hopes, many players may be ok with the
deterioration of liquidity growth, but I think you have to allow that some investors are going
to be leery as the program winds down, fearing that it will adversely affect market confidence as
well as the economy. So, some further degree of deterioration of the market's elevated p/e ratio
cannot be ruled out.
Progressive decay in the growth of monetary liquidity may not rule out a market advance
for 2014, but long experience shows that business risk begins to rise after liquidity rolls over.
In this regard both business and banker confidence will have to be monitored carefully as the
Fed executes its program.
(For a fresh daily SPX daily chart, click on the highlighted SPX lettering in the Jan. 28 post.)
The economy may grow nicely as the Fed withdraws QE, but this expectation is debatable
enough to suggest the market for quality bonds not be written off as the Treasury market
especially will operate as a safe haven if economic momentum deteriorates and the economy
turns choppy. The T- bond rally for Jan. gives the clue.
If, as I dearly hope, the economy has been launched into a period of moderate and self -
sustaining growth, bond players will again look forward to the time when the Fed gets
around to raising short term interest rates and the bond market will find a level that
comports with a rising trend of short rates. If the Fed decides to fall behind the curve and
suppress short rates, then you can watch one and two year Treasury yields to see if the
market chooses to bypass the Fed to lift yields.
- 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 !!!