Investing

Thanking the Fed, Reservedly, for Investors' Bounty


All hail Ben Ber-nan-ke
Ba-rumpa bum-bum
He set the Dow Jones free
Ba-rumpa bum-bum
ZIRP now for five years straight
Ba-rumpa bum-bum
QEs of $3.8T
Bum-bum, bum-bum
Bum-bum, bum-bum
Bum-bum, bum-bum
Facebook (FB) worth $112B. …

Don’t look at me like that—Walgreen (WAG) went full-yuletide in August. In any case, should you find yourself looking at your 401(k) for the first time since the Subprime Swoon, be Thanksgivingukkah-grateful for the extraordinary largesse of this Federal Reserve.

Thanks to outgoing Fed Chairmen Ben Bernanke and the nominee to replace him, Janet Yellen, and their colleagues taking down interest rates to near-zero five years ago and keeping them there—on top of the Fed’s nearly $4 trillion of creative asset purchases—investors have enjoyed the restoration of more than $13 trillion in U.S. equity market value. That’s called multiplier effect. And it’s also called remorse, if you were one of the record numbers who bolted stocks altogether and are scrambling to get back in now, after indexes have more than doubled. It’s also called financial repression if you’re a saver having to eat negative real rates on your hard-earned cash.

Still, a recapitalized Wall Street is again unabashed. One fund manager even proposed a friendly raid of sorts on government-run Fannie Mae (FNMA) and Freddie Mac (FMCC). Real estate is feeling giddy in most parts of the country. Corporate treasurers are in clover. Junk bonds have never had it this good: High-yield-co-dependents Sprint (S) and Charter Communications (CHTR), you could argue, wouldn’t live to see another day if debt markets weren’t so promiscuous. Before the Fed’s record easing campaign, its main interest rate was at 5.25 percent; it’s been at zero to 0.25 percent since December 2008.

Any wonder why capital markets threw a summer temper tantrum merely on signaling (arguably) from the Fed that it could soon reduce the size of its asset purchases (not end them, mind you—much less hike interest rates). Either way, the lame-duck Bernanke Fed opted to hold off.

This chart, via the McClellan Market Report, truly says it all:

“If it shows what it appears to show,” says University of Texas economics and government professor James Galbraith, “then it’s not difficult to grasp why the Fed’s tapering has acquired the habit of ever-receding into the future.”

Citigroup (C) Global Markets estimates that 90 percent of all stocks are held by the top 20 percent of income owners, who then chip in half of all discretionary spending. But according to Gallup, only about half of Americans now own shares, a low not seen since at least 1998. Accordingly, and as shown in this chart from Bespoke Investment Group, the spread in confidence between higher and lower-income Americans is at a record high. Also at a record high: the demand for food stamps, which has doubled in a decade and has decoupled from job and stock market growth.

So then where to from here? James Paulsen of Wells Capital Management predicts that 2014 will kick off with an incoming Fed chairman widely perceived as dovish, while short-term interest rates linger at zero, long-term yields remain close to record lows, the unemployment rate sinks to a six-ish range, annual wage inflation nears its highest rate of the recovery, capacity utilization approaches 80 percent, and real economic growth simultaneously gains in the U.S., Europe, Japan, and the developing world. Put it all together, says Paulsen, and:

“[T]he chance of a serious ‘fear of inflation’ next year is worthy of consideration. As history has often demonstrated, an actual inflation problem is not required (simply a change in inflation expectations) to cause considerable fluctuations in the financial markets.”

The only rational conclusion: While the going’s this good, you should to make like Norman Rockwell and pass the butternut latkes.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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