Tags: federal reserve | easing | economy | janet yellen

Strategist Lance Roberts: Fed Still Stimulating US in 'Stealth Mode'

By    |   Wednesday, 26 November 2014 12:33 PM

Those who think QE is over should think again — it's simply mutating, according to Lance Roberts, chief portfolio strategist for STA Wealth Management.

The result could be heartache for complacent investors, in his view.

“QE is dead, long live QE,” Roberts wrote on his Street Talk website of the massive bond purchases, dubbed quantitative easing, that ceased in October after years of blowing up the nation’s balance sheet to astonishing levels of debt.

Roberts contends that the S&P 500 is up to record levels precisely because of years of ultra-easy monetary policy by the Fed, which hasn't really changed just because the bond purchases ended.

“The answer lies in the Federal Reserve balance sheet itself. Despite the Fed's statement that they ended their liquidity support in October, the reality is that it is still occurring behind the scenes in ‘stealth mode,’” he wrote.

Roberts presented data showing the Fed raised its balance sheet, i.e. the debt it is carrying on the nation’s books, by $2.133 billion in early November, then by another $14.742 billion in mid-November – perhaps not so coincidentally occurring with the recovery of the S&P 500 from the sharp drop it commenced in October.

“Despite valuations, bullish sentiment and complacency rapidly hitting extremes after the brief October correction; investors have been taught that the ‘Fed will not let the markets decline.’ This belief continues to push investors to change markets with disregard of the rising underlying risk. Such beliefs are extremely dangerous in the long term and has always ended in tears,” Roberts wrote.

“However, in the short-term, bullish optimism reigns as risk-taking is the ‘gift of choice’ this winter season. Investors are making their list, and checking it twice, as they prepare for the expected arrival of the year-end ‘Yellen Claus’ rally. The only question is whether ‘Jack Frost’ once again steals the show dashing hopes for economic recovery and negatively impacting profit margins.”

Reuters reported that in 2000, the Fed held only about $500 billion in assets, much of it in the form of government bonds, on its balance sheet. But now that debt number is about $4 trillion higher.

“The question of how to ease down the Fed’s huge balance sheet remains, but when viewed through the lens of the global financial meltdown it helped prevent, the price tag could be worse,” Reuters concluded.

In an opinion piece for MarketWatch, columnist Satyajit Das, a former banker and author of “Extreme Money,” did not reach the same conclusion.

Das said the Fed is now stuck with the dilemma that normalizing interest rates and reducing central bank holdings of securities risk higher interest rates that could drag down the economy, while the current low rates allow overextended companies (and nations) to maintain — or even raise — their debts.

“The balance-sheet expansion required by QE programs exposes a central bank to the risk of losses on its holding of securities from defaults or (more realistically) higher yields, ironically if the economy recovers and rates rise. In theory, there is no limit to the size of the losses a central bank can incur,” Das wrote.

“And while central banks have not maxed out their capacity to act, and inflation remains low, existing policy does not address pressing issues and may not be capable of restoring economic health.”

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Those who think QE is over should think again -- it's simply mutating, according to Lance Roberts, chief portfolio strategist for STA Wealth Management.
federal reserve, easing, economy, janet yellen
Wednesday, 26 November 2014 12:33 PM
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