Did They Really Order That

It’s happened to us all.

We’re sitting in a restaurant with our kids when the waiter asks, “What can I get you?”

The usual responses flow from around the table, but then one of the kids pipes up with an answer that sets your warning bells screaming. Maybe they order artichoke spinach dip, or something simple like mushroom soup, but whatever it is, you know it will end badly.

So you ask the same old parent questions, like “Are you sure you want that?” To which every kid in America immediately responds, “Yes!” They become defiant. Of course they want it! They ordered it, didn’t they? Your judgment means nothing. It doesn’t matter that you know they don’t like the ingredients, or that they’ll lose interest when the food arrives and wish they’d ordered a burger.

So the order stands.

The food arrives.

The moment is at hand.

The food is tasted…

And of course it’s rejected. A win for parent logic, a loss for the parent’s pocketbook, and another spoiled dining experience.

I think a bunch of Fed watchers just ordered something that they don’t like…

Over the last four years, the Fed has become so involved in our financial lives that we now base our investment decisions on what we think this entity will do next.

Think about that for a minute.

Corporate earnings take a backseat.

Economic measures come and go.

We now base the safety and hopeful growth of our wealth on the decisions made by less than 20 people who meet eight times a year.

For over four years there has been little else of consequence. We’ve talked about the risk of this situation over and over. We warned of it in our last book, The Great Crash Ahead (2010). We used the metaphor that the markets, and therefore the nation, are addicted to the drug of newly printed money and Fed bond buying.

So when many people extolled the virtues of the U.S. economic recovery, and how the Fed’s intervention was just a sideshow that was really muted by the buildup in the excess reserves of banks, we pointed out that the house of cards would come crashing down once the Fed turned off the new money tap.

Well, a month ago the Fed released the minutes from its April meeting where a potential slowdown in bond buying was discussed.

The markets swooned.

Then, last week, after its June meeting, dear old Ben reiterated the idea that they would slow – or taper – their bond buying at some point, possibly in the near future.

The markets puked.

I know those same Fed watchers are still out there… those guys and gals who are positive on the U.S. economy and bullish on the markets… the ones that always seem to show up on television, talking about how great things are.

I assume many of them work for banks, but I don’t have any substantial proof of that. It’s just a well-educated guess.

What I do know for certain is I haven’t seen them in the past couple of weeks. Their story – that the U.S. economy is fine and can easily handle the exit of the Fed – is getting stretched pretty thin right now.

It is possible that this is simply a knee-jerk reaction.

It is possible that market participants have greatly exaggerated the effects of the Fed slowing down its programs.

It is possible, but not likely.

Instead, we expect that investors are right on the money.

The markets of the last four years have been nothing but a pretty artifice built on the notion that the Fed would stay involved forever. Now that the veneer has been pulled away, people are looking at the underlying economy and realizing that things aren’t so rosy.

Two percent GDP growth, and that’s with tremendous Fed spending and government deficits, is paltry.

Flat and falling wages are downright harmful.

Then we get rising taxes, healthcare costs, and education costs to boot.

But here’s the interesting part. This might not be what many people want, but it’s exactly what we need. Relying on the artificial crutch of quantitative easing does nothing to address the real issues we face. It simply delays the day of reckoning.

Money should cost more (higher interest rates), not less, because that would reflect the real cost of capital and provide lenders (bond buyers) with a positive rate of interest.

Equities should be lower as companies face a raft of difficulties, ranging from strapped clients to a slowdown in exports and commodity prices.

With such adjustments in the financial markets, to better reflect where we are today, perhaps we can stop a few pundits and politicians from claiming that all is well just because interest rates are (artificially) so low and equities are (artificially) so high.

We can identify that the pessimism in the system is borne out of a concern on the part of businesses for finding the next qualified customer… the one that’s not weighed down by student loans and/or sky-high medical costs.

The Fed, upon seeing what its statements had done, spent the last several days trying to take back what it said. It really will stay involved as long as the economy is weak, we’re told. Now with a very disappointing GDP revision for 1st quarter 2013 (down from 2.4% to 1.8%), people are breathing a sigh of relief. A weak economy means an engaged Fed. At least for now.

But this doesn’t mean you should relax. The Fed’s shot across the bow, and the market’s reaction was an early warning sign of what’s to come. The Fed will slow down its bond-buying program, and when it does, expect the wheels to come off this market.

Stay vigilant.

Stay informed.

Your financial future depends on it.

Rodney

P.S. As I’ve mentioned in past Survive & Prosper articles, the world has turned upside down. It’s completely irrational. Good news, like the recent economic statistics, will be bad news for the markets because any perceived strengthening of the economy (albeit it misplaced), will have the Fed tapering sooner rather than later… and we know markets won’t like that. That’s why we expect a major crash ahead. We’re talking the Dow imploding to 6,000… even lower. We’ve recorded a presentation for you to explain what’s going to happen, when… and what you can do to protect yourself. Listen now.

 

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Categories: Markets

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.