Home About Archives RSS Feed

The Independent Investor: Can it be this simple?

By Bill SchmickiBerkshires Columnist

Financial gurus have come up short in explaining exactly why interest rates are going down, and not up, as everyone expected them to do. The same thing is happening overseas. What gives?

Pundits have been trotting out the same old reasons for why rates are declining. Slow-growth economies in North America, Europe and Japan have persisted this year, much to the surprise of everyone. So central banks worldwide are maintaining an easy-money policy, which is driving all interest rates lower. That is at odds with the Fed's view of economic conditions.

If you recall, back in May of last year, the Fed announced that the U.S. economy was gathering so much steam that they had decided to begin tapering their $85 billion a month stimulus program beginning in January of this year.

Interest rates spiked higher as the bond market anticipated not only the end of stimulus but higher economic growth as well in 2014. The Fed was right, but only in the very short term.

The fourth quarter GDP hit 4 percent. But then the economy fell off a cliff.

Economists would have us believe that the Polar Vortex is to blame. I expect when the first quarter is finally revised for the final time we will have experienced a minus sign in growth for the first three months of the year. No question that the prolonged season of cold weather hurt the economy, but by how much? No way was that decline all weather-related, in my opinion.

Through it all, the stock markets have refused to go down, despite the slowing economy, cautionary earnings and revenue forecasts by corporations, the Ukraine, and any other bad news.

We are in an environment where new highs in stocks are reflecting an expectation that economic growth will not only continue but accelerate. Historically, when the economy gains momentum, interest rates rise and the stock market goes up. When the economy weakens, the reverse happens. So, my dear readers, either the bond market has it wrong or the stock market does.

What or who is the fly in this particular ointment? My guess is the Fed has a lot to do with this.

Think back, what happened when our central bank announced the first quantitative easing plan, known as QE I. The economy gained ground, the recession faded and the stock market took off. When the Fed announced the end of that program, the economy slowed, and stocks plummeted. So the Fed announced QE II. The process was repeated: stocks up, rates down and economic growth. By the end of QE II, the bond market and corporate America had learned a thing or two about central bank stimulus. They learned to anticipate.

Corporations began to pull back their investments. The bond market headed lower, bracing for more sluggish growth and a possible recession and stocks headed lower. Enter QE III. But by then, even the Fed realized something had to change. So they changed the game plan.

As QE III was about to sunset, Ben Bernanke, the Fed chairman at the time, extended QE III indefinitely. He promised that the stimulus would continue until the economy was able to stand on its feet again without assistance that unemployment needed to drop to at least 6.5 percent and that short-term interest rates would stay low out to 2015.

The stock market took off and the economy gathered steam once again. Fast forward to today. QE Infinity is winding down at a rate of $10 billion dollars per month. By the end of the year the Fed plans to end their stimulus program entirely. It has already been cut in half, year to date. The economy has slowed from 4 percent in the fourth quarter to 0–to–negative in the first quarter. The data seems to indicate it is slowing still. The bond market's low interest rates are indicating the same thing.

So something has to give. If bond players are right, (and they tend to get it right more often than stock jockeys) then we can expect even slower growth in the months ahead. Might the Fed reverse course if that were to happen? The consensus says no, but consensus tends to be wrong fairly often. In the meantime, what in the world is the stock market doing at record highs?

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Clarksburg Sees Race for Select Board Seat
Crosby/Conte Statement of Interest Gets OK From Council
WCMA: 'Cracking the Code on Numerology'
BCC Wins Grant for New Automatic External Defibrillator
Clark Art Screens 'Adaptation'
Drury High School to Host End-of-Year Showcase
Clarksburg Gets 3 Years of Free Cash Certified
Pittsfield CPA Committee Funds Half of FY24 Requests
MCLA Men's Lacrosse Falls in League Opener
Letter: Vote for Someone Other Than Trump
 
 


Categories:
@theMarket (480)
Independent Investor (451)
Retired Investor (184)
Archives:
March 2024 (6)
March 2023 (2)
February 2024 (8)
January 2024 (8)
December 2023 (9)
November 2023 (5)
October 2023 (7)
September 2023 (8)
August 2023 (7)
July 2023 (7)
June 2023 (8)
May 2023 (8)
April 2023 (8)
Tags:
Debt Debt Ceiling Employment Metals Jobs Europe Deficit Rally Stock Market Election Energy Europe Congress Oil Interest Rates Federal Reserve Selloff Greece Banking Currency Recession Fiscal Cliff Retirement Japan Pullback Stocks Taxes Crisis Bailout Banks Economy Euro Markets Commodities Stimulus
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
The Retired Investor: Immigrants Getting Bad Rap on the Economic Front
@theMarket: Sticky Inflation Slows Market Advance
The Retired Investor: Eating Out Not What It Used to Be
@theMarket: Markets March to New Highs (Again)
The Retired Investor: Companies Dropping Degree Requirements
@theMarket: Tech Takes Break as Other Sectors Play Catch-up
The Retired Investor: The Economics of Taylor Swift
@theMarket: Nvidia Leads Markets to Record Highs
The Retired Investor: The Chocolate Crisis, or Where Is Willie Wonka When You Need Him
The Retired Investor: Auto Insurance Premiums Keep Rising