Why the US Federal Reserve is Driving Towards a Cliff…Again

Depressed Businessman
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It was all happening in the US overnight. Initial estimates for first quarter US economic growth came in at just 0.1%, which everyone put down to ‘the weather’ and ignored. Why should economic growth matter when you’ve got low interest rates anyway?

Then the US Federal Reserve came out and announced, as expected, a continuation of their tapering program. Starting from now it will only pump US$45 billion per month into US asset markets, as opposed to US$55 billion per month. But don’t worry, there were assurances aplenty. The Fed won’t let anything bad happen.

‘If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

‘The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.’

This combination of bad economic news and good monetary/liquidity news sent stocks higher. The mainstream media got caught up in the liquidity hype and gushed about the Dow Industrials closing at a new record high. See if you can see it below…

Dow at a Record High — Just

Dow Jones Industrial Average Index December to April 2014
click to enlarge

  That tells us the Dow is up a mere few points for the year. No matter what the US Federal Reserve says, it’s hard for a market to advance strongly into monetary tightening, which is what the taper is all about.

Just in case you are in doubt about our views on this market, we’ll state it clearly: It’s a speculative gamble-fest, driven by hedge funds and leverage on the one side, and restrained by seasoned long term investors on the other. As monetary tightening continues to bite, the seasoned investors will win the argument. They always do.

In the meantime, you’re confronted by the dangerous idea that everyone thinks the Fed will take care of things in the event of any trouble, so therefore there won’t be any trouble. It doesn’t matter that this is a ridiculous idea with no basis in historical fact.

Our brains are prisoners of the very recent past…this idea has its origin in the post-2008 ‘recovery’. That is, central banks got us out of the mess via reflation and will keep us permanently propped up on a cloud of hope (also known as belief and confidence). Our brains are also dumb, as we tend to promptly forget any decent lessons learned throughout history, casting aside the wisdom of generations past, because, well, this time it’s different.

Well, it ain’t. The Fed is driving the car toward a cliff…again…and it will crash hard when it goes over. The fact that nobody knows where the cliff edge is isn’t enough reason to stay in the car. Get out while you can.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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4 Comments on "Why the US Federal Reserve is Driving Towards a Cliff…Again"

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slewie the pi-rat
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the checks are in the mail and almost certainly will remain so for May, 2014, while corporatism’s rope-a-dope beat goes on.

Jason
Guest

The cliff that ends it all is the ‘oil supply cliff’. No growing supply of cheap oil means no economic growth so no debts can be surviced so the entire economy plunges into depression.

Harquebus
Guest

That is true. EROEI mate, EROEI.

Harquebus
Guest

Unfortunately, the people who need to be reading this, great article by the way, are not here.

wpDiscuz
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