Is There an End in Sight for QEternity?

So to answer those questions, we need to first step back in time a bit and revisit the conditions stated by the Fed back in September of 2012 when QEternity began. Chairman Ben Bernanke told the world that the latest round of artificial stimulus (alright, he didn’t call it that) would continue until unemployment fell to a level of 6.5% and the economy was growing at a pace of 2.5%. And if you go back and read his original comments from 2012, it gets even better. He went on to say that, and I quote “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

So not only was he specific about what unemployment and economic growth needed to look like before the Fed would start to exit the scene, but he even went on to specify that stimulus would continue even after the economic recovery strengthens. So here we are today and the bond market is panicking that the Fed might start to exit its bond buying program known as QE3 and stop or slow down its $85 billion per month purchase of mortgage and treasury bonds, which artificially keeps the prices of those and most bonds in the market high, and as a result, keeps the yield or interest rates low. So the first thing we need to take a look at is whether or not we are on track to achieve an unemployment rate of 6.5% in COMBINATION with economic growth of 2.5%. And the clear answers to both of those questions is NO. Currently unemployment sits at a level of 7.4%, and economic growth is running at about 1.1% as of last month. So there is no question that the Fed’s objectives are not even close to being met. Also, as for unemployment, keep in mind a minor technicality that needs to be considered by the Fed that was likely not considered when the 6.5% number was thrown out to the world as a possible trigger to end QE3. When someone is unemployed, meaning they are collecting unemployment, if they take a part time job, they are considered 100% employed. It’s a fact that the recent miniscule drop in unemployment from 7.6% to 7.4% was driven mainly by people accepting part time jobs who need full time jobs. So even though the official government numbers have slightly dropped, a part time job for someone supporting a family is not anything to celebrate.

As for the growth of the economy, last month our GDP was running at an annualized rate of about 1.1% versus the 2.5% that Chairman Bernanke said was needed for the Fed to start backing away.

So what is the message that you can take away from all of this as an investor? Be careful making any major changes in your portfolio based on what you think might happen with the stimulus between now and the end of the year. I expect the government to be forced to stay actively involved in pumping up markets, and the real numbers clearly show that we won’t easily survive without Uncle Sam supporting the weakest recovery in American history.

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