The Federal Reserve’s rate-setting meeting yesterday and today is, so far, the year’s most important investor event.
That’s the conventional wisdom, given that investors are trying to divine when Chairman Ben Bernanke will curtail the $85-billion-a-month stimulus program that’s propelled the benchmark S&P 500 by 143 percent since the post-crash low in March 2009.
But it doesn’t really matter. That’s because the central bank will only ease back its bond buying if the economy is strong enough to grow on its own. So, either way, stocks ought to gain, at least in theory.
The much bigger problem is the mountain of debt — an estimated $4 trillion by the end of this year — printed by the Fed. It’s clear that the central bank is trying to use debt to solve the debt crisis of 2008. Yet, in the long run, more debt can only cure the problem if it generates real economic growth.
There’s no evidence, so far, that it’s working. Over the past four years — a time period that excludes the giant slump in late 2008 and early 2009 — the economy has grown an average of 2 percent a year. That isn’t enough to increase company profits, lower unemployment or, yes, enable the U.S. to pay off its debt. (That’s why tax increases are inevitable, but that’s another issue.)
|The Fed’s QE program has hurt millions of Americans by eroding their standard of living.|
A week from today, the government will confirm the economy expanded 2.4 percent in the first quarter, according to a survey of economists by Bloomberg. Those same economists predict growth of 1.7 percent in the second quarter — a slowdown.
If the central bank’s quantitative-easing program hasn’t helped — except by creating an illusory world in which stocks rise for no fundamental reason — it certainly has already hurt millions of Americans.
To some extent, it will be future generations who are burdened with an overload of debt from which they didn’t benefit. But, mostly, it’s the average American whose standard of living is being eroded today.
Putting a drag on the consumer-oriented economy is the fact that Americans earn less today than they have in years. The median annual household income was $51,404 in February, according to a March report by Sentier Research. In June 2009 — in the midst of the Great Recession — it was $54,437. Even in January 2000 — more than 13 years ago — the figure stood at $56,101.
Debt overload means our economy has little hope of returning to the glory years. (Doesn’t the term “Goldilocks economy” seem quaint by today’s reality?) But the Fed is exporting its ideas to other countries.
The Fed Infection
As I wrote in a recent Money and Markets column, we can see a microcosm of these issues in the launch of what has been called “Abenomics” in Japan. Shinzo Abe, the Asian nation’s prime minister, has adopted the policies of the Federal Reserve with the goal of arresting the deflationary spiral that has held the Japanese economy hostage over the past two decades — but to do it faster and with more money. As a result of Japan’s policy shift, the yen has plummeted and stocks have rocketed as much as 50 percent this year.
Even countries with “normal” monetary policies — notably, emerging economies — demand for exports is weak, reflecting declining consumer incomes in the West. Many, the most important of which is China, are trying to reorient their economies to domestic consumption while deflating a housing bubble. But, alas, companies are struggling to make money, so their economies are cooling.
Yet, in the developed world, the power of monetary policy is paramount, and liquidity is king. That’s why U.S. investors have been sanguine about the stand-off on the Korean peninsula, the process of sequestration in Washington, D.C., and Cyprus’ confiscation of bank depositors’ money.
The Bottom Line
It all comes down to this: Your portfolio should revolve around a solid core invested in the shares of high-quality companies domiciled around the globe. Moreover, depending on your objectives, you should consider commodities, precious metals, short-term fixed-income securities and a variety of alternative investments. That way, you’ll be out of the Federal Reserve’s reach.
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