Well, I wish I had that 10 minutes back. I spent that amount of time yesterday reading the Fed's statement, along with Chairman Jay Powell's opening remarks and the FOMC's detailed economic projections. If you don't have time to read these documents, consider yourself lucky, but allow me to summarize. The Fed is going to keep showering the U.S. economy with free and nearly-free money. This "news' surprised no one. In fact, the decline in the Nasdaq, which brought the S&P to a slight loss for the day after a sharp rise after Powell began speaking at 2 pm, was quite telling.
This market is ignoring the Fed.
Why? Because this Fed is the most hopelessly inept bunch of con artists this side of Enron. When Powell speaks, he is trying to do one thing: get stock prices to rise. I believe that he believes that is his only job. When the market crashed in February on Covid-19 fears, "Free Money Jay'' came to the rescue. It's almost annoying , because I think that he actually believes he is accomplishing something...by doing nothing.
That's what the markets expect from the Fed. Zero short-term interest rates, which of course are set by the Fed. Long-term rates are not directly set by the Fed, but Powell once again yesterday committed the Fed to "QE Infinity" and buying bonds as a matter of practice, not as an emergency tactic.
Is it obvious that I am not a big fan of the current leadership of the Fed? Let's hope so. I tend to stick to investment ramifications, though, and there are several here. Firstly, in addition to its credibility, the Fed has also lost its ability to influence the economy by cutting rates. They will not go below zero. So they are stuck with these pointless QE exercises.
Thus, government bonds, both as a discrete investment and a pricing benchmark for privately-issued debt securities, are quite valuable. I see a near-zero risk of U.S. Treasury interest rates rising any time in the near future, so if you hold Treasures, there is certainly no reason to sell them. The idiosyncratic risk that individual company securities hold is not going away, and Powell did mention the continuing problems of unemployment (8.4% currently) in the Covid-19 era. So there are fewer employed consumers to "buy stuff" and government transfer payments will only last for so long. Obviously they will last until after the election, but as we move into 2021, bonds of companies whose profits are dependent on consumer spending may have to be de-rated to account for higher default risk. Stick with companies with positive free cash flows and you'll be fine with your fixed-income holdings.
But what about stocks? With "Crazy Jay" Powell so deeply ensconced in his ivory tower that his press conferences give the distinct impression that he has zero knowledge of the real U.S economy, there is a deep, yawning, chasm at the top of the U.S. economy. Where the cigar-chomping Paul Volcker and the Ayn Rand-quoting Alan Gremspan used to reign, we have a guy who seemingly has zero qualifications for this post (his Wikipedia bio is here if you would like to judge for yourself) and has done nothing to refute assertions that he was never qualified for his position in the first place.
With a void in leadership from DC, stock market investors will look to the New Colossi of the U.S economy, most of whom are located on the West Coast. We know them by their first names/nicknames. Elon, Tim, Zuck, Sundar, that hipster dude who runs Twitter (TWTR) , etc. The media chooses to lionize these guys because no one in the media has taken the time to learn how to read financial statements and value companies.
I have.
So, with a rudderless U.S economy from a Fed perspective, it's now a stock picker's market. That's the kind I love. I will have more ways to play the incredible, shrinking Fed in tomorrow's column, but, for today, keep holding onto your bonds.
