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Keith Springer: Don’t ‘Fight the Fed,’ Stocks to Rise

Tuesday, 02 Oct 2012 07:52 AM

The Federal Reserve’s decision to buy $40 billion a month in mortgage-backed securities from banks will harm the country by adding more debt to an already over-leveraged economy, but in the meantime, stocks will rise, said Keith Springer, president of Springer Financial Advisors in Sacramento, Calif.

The Fed’s policy tool, officially known as quantitative easing (QE) but widely referred to as printing money out of thin air, works by flooding the economy with liquidity in a way that pushes down interest rates to spur investing and hiring.

As a result, the dollar weakens and stocks rise.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The move marks the third time the Federal Reserve has rolled out QE measures, with two previous rounds injecting a combined $2.3 trillion into the economy over the last four years.

Other stimulus tools in play include Operation Twist, under which the Fed sells its short-term Treasury holdings in the open market and buys longer-term government debt, which keeps long-term interest rates lower.

Unlike QE, Operation Twist doesn’t involving so-called money printing but does add to the overall loose approach to monetary policy — and to temporary gains for stocks.

“Bernanke’s decision to not only continue Operation Twist at its current level, but also to throw an additional $40 billion a month of yet-to-be printed dollars at mortgage bonds, is a lot of new liquidity and will likely delay the major sell off that investors have been waiting for until sometime next year,” Springer said in a note to clients.

“Combined, these programs total over $85 billion per month until the labor market improves substantially. Considering that it’s going to be many years before the unemployment rate drops to 5.5 percent, the level I presume they are targeting, QE Buzz Lightyear will be driving this economy to infinity and beyond.”

The unemployment rate currently stands at 8.1 percent.

In the meantime, Fed policies will send stocks gaining.

“[T]here is simply no reason to fight the Fed, meaning investors should not bet against the Federal Reserve. Investors should expect higher highs in the weeks to come,” Springer said.

Investors do need to remember, however, that stock prices are rising due to monetary stimulus measures and not due to a stronger U.S. economy.

The Commerce Department revised its second-quarter gross domestic product growth rate to 1.3 percent from 1.7 percent.

The economy grew a lackluster 2 percent in the first quarter.

Meanwhile, the Fed will have to mop up the sea of liquidity it has injected through QE, especially when the economy improves and interest rates must rise.

“Naturally, this will have debilitating effects on our economy sometime in the future,” Springer said.

“After all, the answer to too much debt is not more debt. All of this money will have to be paid back. The balance sheet of the Federal Reserve is now at a mind-numbing $1.9 trillion with a cool new half trillion dollars added every year until we reach whatever is deemed an acceptable unemployment rate, in a time of an already extraordinary U.S. indebtedness and stubbornly high unemployment.”

Other experts have warned that liquidity injections will pump up inflation rates down the road.

“Although economic weakness now prevents inflationary price increases, these conditions will not last forever. At some point, demand will increase and companies will recover the ability to raise prices,” Harvard economist Martin Feldstein writes in a Financial Times opinion piece, adding inflation could arrive even before unemployment rates fall.

“Such price inflation has historically been associated with tight labor markets and rising wages. But this time the unprecedented high level of long-term unemployment could cause the unemployment rate to remain high even when product markets tighten.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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