The Dow and S&P were down only one-quarter percent and Tuesday was marked by a flurry of earnings reports, announcement of a takeover by Walgreens (WBA) of Rite-Aid (RAD), and chatter about the presumably uneventful meeting of the FOMC that will conclude Wednesday. Oil looks like it will test support below $40, which could have enormous implications for markets.
A consistent theme of these articles has been that the Fed remains stuck on a course of employing emergency measures put in place in response to the 2008 episode of the ongoing financial crisis, and markets have become addicted to this support.
For years Fed officials have asserted that they realize they can’t continue these policies indefinitely and must one day withdraw the stimulus, but they have never actually done so.
Many commentators, including some regional Fed presidents, have come to realize that the window has closed, at least for another year. One is reminded of Herbert Stein’s Law, which holds that, “If something can’t go on forever, it stops.” With accommodation in place for nearly a decade, that law is being tested.
This writer has observed for some time that the blithe assumption by Fed officials and most commentators that the Fed controls when rates will rise could turn out to be wrong, with serious and even disastrous consequences for some market participants that could touch off another round of bailouts as Yellen puts are submitted for redemption.
Another view comes from Bill Smead, CEO of Smead Capital Management, who stated on CNBC
: “The market will take rates higher before the Federal Reserve will. In other words, the demand for credit will kick in, and it will be the open market that will normalize interest rates over the next three to five years, rather than the Fed leading the way. They will follow the market.”
Asked how one would “Fed-proof” a portfolio in light of this scenario, Smead said this is not his objective, because the biggest risk for most investors in the U.S. stock market is that over the next three to five years the economy will be dramatically better than anyone can wrap their mind around right now.
"And since we believe that — which, by the way, will be driven by the normalization of housing — we have millions of people getting married, the most of any summer for 20 years, loads of babies coming in the next five years, loads of housing to do, and that would be the demand for credit that would normalize interest rates. So we spend zero time worrying about what the Fed does, because it will quickly get outside their hands once that takes place,” he said.
Smead proceeded to recommend the homebuilder NVR, the largest banks, especially Bank of America (BAC), and then “a very subtle sector,” Gannett (GCI) and News Corp. (FOXA).
This writer has observed that policy has been directed toward the reinstatement of the housing boom that helped fuel the 2008 crisis episode.
It is intriguing to contemplate the prospect that before the current boom busts, it will be extended to encompass the housing industrial complex, the TBTF banks, and the stock market, all backed by the federal safety net as government-sponsored enterprises.
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