What If The Fed Has It All Wrong?

I wrote an exclusive article for Seeking Alpha in which I expand on the following points:

  • Quantitative Easing-induced wealth effects may be wishful thinking;
  • Earnings are the primary drivers for equities and they have peaked;
  • QE3 could be highly counterproductive if commodity prices rise as a result like in previous QEs;
  • Another problem with Bernanke’s wealth effect thesis lies with the new reality in America. Lately, income and assets have been so significantly redistributed that only a tiny few actually feel a wealth effect from rising equity prices;
  • The “wealthy few” may nevertheless have much less after-tax income when politicians finally address the looming fiscal cliff. It is these wealthy people who run American corporations, keeping them lean and mean and flush with cash.
  • The less affluent — the other 250 million people — are little concerned by an eventual wealth effect but highly, directly and immediately impacted by the side effects of all these QEs, namely rising commodity prices and near zero interest rates.
  • At previous QE program launches, equity markets were similarly undervalued, but economic trends were then more positive.
  • If the Fed has it all wrong and the only effect of QE3 is to boost inflation, only God knows what will happen.
  • Bankers are merely experimenting with totally unproven ways hoping to gain enough time until more responsible politicians emerge. Given the significant risk still facing us until Godot arrives, investors should await more evidence that either earnings resume their uptrend or some kind of miracle(s) happen.

Star  The complete article with charts is right here. Star


8 thoughts on “What If The Fed Has It All Wrong?

  1. Denis Ouellet:

    Sir: just discovered your web site yesterday — most interesting analysis on valuation.

    Ecountered major problems with your chart: “Rule of 20 P/E Ratio Barometer.” It is ultra-difficult to read !!!


    1.make your legend box (at top center) clear (white) — currently the black text on dark blue box background is a problem,
    2. present the clear or white legend box with text (black) in a larger font in a column box (rather than current row) in the upper left of the chart (where there is space)
    3. drop the background colours in the chart — make the chart background clear or white — and use horizontal lines with legend to identify (demarcate) what are the zone areas in the chart (what they represent) — currently two time series are identified by two shades of black lines — these are very difficult to distinguish/identify against a dark background !!!
    4. using a clear or white background will require you to reconfigure the colours for two of the time series(currently they are two shades of black lines and one white line) — suggestion for three time series lines: black, blue and red !!!
    5. use larger font for both left and right scales (maybe use fewer horiontal lines — fewer vertical hatchs) — drop the decimal points in scales.

    Still reading your stuff to better understand the significance and interpretation of this important chart — and related analysis.

    I am back-reading your earlier articles to better understand your valuation approach.

    Thank you,

    Gerry O’Brien
    Ottawa, Canada
    Economist — retired

  2. Denis Ouellet:

    I wrote my above comments when I was looking at the chart from an earlier article which had three time series. I notice that the chart in this article has four time series (lines). Please reconfigure the colour schemes for the four time series, e.e., black, blue, green and red — after implementing the above suggestions.

    On reflection: keep the grid (vertical and horizontal lines) BUT PLEASE DROP THE BACKGROUND COLOURS. Focus on developing a system to identify/demarcate the zone areas in the chart and identify what they represent.

    Thank you,

    Gerry O’Brien
    Ottawa, Canada
    Economist — retire

  3. Gerry,
    Thank you very much for taking the time to read me and make the suggestions. I apologize for the admittedly busy chart. I have already applied some of your suggestions and I am assessing the others. I hope to make the chart easier to read and to understand. Please, keep in mind that the entire staff for this blog is yours truly, me and myself. I truly appreciate you spending time on my stuff and commenting.

  4. Hi Denis – excellent site and articles. I clicked here from John Mauldin. I love the fact you use data and not bs. I find it scary that the Fed -could/may have it all wrong. And agree that QE3 won’t do much other than cause some short-term heartache for those of us patiently waiting for our 30 year US T’s to hit 2% so we can sell.

    Thank you again for an excellent blog

Leave a Reply to Denis Ouellet Cancel reply

Your email address will not be published. Required fields are marked *