In case you missed it, last week Ben Bernanke rolled out another misguided money printing campaign. This isn’t QE3, it is QE-infinity. The Bernank opened the monetary spigot and isn’t shutting it off until he sees substantial improvement in the labor market, inflation and speculative bubbles be damned. And if the jobs picture doesn’t improve, the Fed plans to double down on its strategy.
How will we know if the Fed’s actions cause the labor market to improve? We won’t and that is by design. The Fed has rigged the game. No matter the limited efficacy of quantitative easing, the press (and Bernanke’s allies) will attribute any gains in employment to the Bernank. Correlation isn’t causation, but that hasn’t stopped Bernanke from taking undeserved credit for economic improvement in the past.
The Fed has convinced itself that without itself, the American labor market will never recover. I am being serious. You can read it for yourself in the September 13 press release from the meeting, “The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
The economists politburo at the Fed has no confidence in the self-healing power of free market capitalism. By promising to print until the jobs picture improves and to print more if it doesn’t, Bernanke has institutionalized the good is good, but bad is better mentality in financial markets. And you thought investing was hard enough when good was good and bad was bad.
Evidently, even the Facebook crowd recognizes what an unmitigated disaster unbounded money printing is likely to be. The Federal Reserve Bank of San Francisco put up a poll on Facebook asking what the effect of more money-printing would be on the U.S. economy. The top answer: Long term, disastrous. We’ve included a screen-cap of the top responses. You’ll be hard pressed to find a positive comment on the program.
So how exactly does Mr. Bernanke believe more money printing is going to help create jobs? At the press conference following the Fed’s last meeting a savvy reporter from Reuters (sort of like a black swan) asked Mr. Bernanke why this version of money-printing will work when the last few iterations failed so miserably. Dr. B said
So the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle. Stock prices, many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is there is not enough demand, there’s not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better for whatever reason, their house is worth more, they are more willing to go out and spend and that’s going to provide the demand that firms need in order to be willing to hire and to invest.
You got that? The Fed Chairman plans to artificially inflate the price of stocks and homes by flooding the system with more money. His hope is that you’ll pay no attention to the man behind the curtain and spend some of your paper profits. Haven’t we tried that approach with dotcom stocks in 2000 and real estate only a few years ago? Oh well, maybe the third time will be the charm. After all what could go wrong?
As the Fed’s money printing campaign further unmoors the U.S. stock market from the underlying fundamentals of the economy (the S&P is already expensive at 19X normalized earnings), investment risk is rising. Global diversification is now more the mandate than ever. Put all your eggs in Dr. Bernanke’s basket at your own peril.
Jeremy Jones, CFA
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