Opinion: Wall Street is Over QE
Could it be? Could the most amazing bull market in history really be ending? Will we look back at Dow 16000 as the last, great moment of jubilation for investors?
The answer is an absolute yes.
Sorry, Charlie. It’s just best to accept it and move on. This historic chapter in American finance is over.
Stocks have soared more than 140% from the lows we experienced during the economic implosion; and many Wall Street professionals are quick to point out our rising stock market is a direct result of four rounds of aggressive monetary policy action by the Fed. It’s not about earnings and it certainly isn’t about robust economic growth. It has everything to do with the Fed's juice.
Current Fed Chairman Ben Bernanke gave a sensational speech Tuesday where he described the purpose of continuing with several rounds of quantitative easing, despite some quiet positives with the economic recovery. He noted improvements in housing and labor, but stopped short of declaring victory in these key areas. Bernanke did acknowledge, though, the unemployment rate will be the critical metric used to determine future monetary policy action.
It seems an unemployment rate of 6.5% is going to be the target to get the Fed to consider a change in monetary policy. But it’s a moving target. To remind you, the key target at one time was 7.5%; however, the FOMC wasn’t “comfortable” with the overall health of the economy once this level was achieved.
So, if you think 6.5% is the catalyst for change, you’d be wrong.
And, Bernanke made note of this during his speech. The 6.5% figure is a “threshold” and not a “target.” In other words, we should only consider it to be a conversation starter.
Now after hearing this revelation about arbitrary feelings being the rationale to adjust the current quantitative easing program, you would think Wall Street will be experiencing a Gatsby moment. After all, the next head of the Fed, Janet Yellen, is a clone of Bernanke’s thinking which is that asset bubbles do not exist and the current monetary policy seems to be just fine.
The only question remaining from investors should be where is the champagne? But, oddly enough, the party seems to be getting stale, which does not bode well for the future of equities.
For the past few years, we’ve had to deal with government shutdowns, a ratings downgrade, awful earnings, and higher taxes. Yet, stocks just ignored all of this and kept seeking higher highs. To put it another way, fundamental analysis has become as irrelevant as the BlackBerry. It simply serves no purpose. Unless, of course, you remove the power of quantitative easing.
By year-end 2014, the Federal Reserve will be responsible for adding almost $5 trillion to the economy. And Wall Street can care less about this figure. After all, $17 trillion in debt willfully created by the U.S. government doesn’t resonate, so the Fed’s amount is really inconsequential for most of us.
But what is interesting is the $85-billion-per-month number: It simply doesn’t have the gravitas that it once did. Recent macro data reports show us an economy just sputtering along while we receive monthly jobs figures that are ho-hum. It’s a malaise, and we’re bored. Wall Street traders and investors need something exciting, and the fancy new iPhone isn’t going to do the trick right now.
It is this boredom, with very few high fives in the earnings department, which is making investors a bit nervous and anxious to get out before the damn breaks. Unless investors see a clear element of economic growth to support an economy and permit it to grow organically, people will turn to the Fed for additional help. And, all signs are suggesting this is out of the question.
Therefore, you have to ask yourself: Do you really want to assume so much risk being long this market? Feel free to answer in the comments section.
Todd M. Schoenberger is the founder and managing partner of LandColt Capital LP, and serves as Portfolio Manager of the LandColt Onshore and Offshore Funds.
Follow Todd on Twitter @TMSchoenberger and @LandColtCapital.