The chasm between what central bankers are saying about monetary policy and what the economy is actually doing couldn’t be wider than it is today.
On Wednesday it was Ben Bernanke, outgoing chairman of the Federal Reserve, delivering one of his last major speeches on the economy. He trotted out yet another round of excuses for why policy had to remain easy, saying:
“The target for the federal funds rate is likely to remain near zero for a considerable time after the asset purchases end, perhaps well after.”
A few days earlier, it was incoming Fed Chairman Janet Yellen who talked a dovish game before Congress. She said:
“[The] labor market and economy [are] performing far short of their potential,” helping her to defend keeping rates low and QE at crisis-era levels.
But what are the numbers showing?
No More Crisis
The latest industrial production figures from a few days ago are a case in point. Core manufacturing activity accelerated to 0.3 percent in October from 0.1 percent a month earlier, topping economist expectations. That confirms the message from private surveys like the ISM manufacturing index, which just hit its highest level since mid-2011.
|Manufacturing acceleration is underway.|
Then, less than a day after Bernanke’s dovish testimony, October retail sales figures hit the tape. Sales jumped 0.4 percent, the most in three months and well above the 0.1 percent average forecast of economists. A specific sub-category of sales used to calculate quarterly GDP accelerated to 0.4 percent from 0.3 percent in September, suggesting the fourth quarter could look healthier than the third.
The latest jobs report showed a much better-than-expected rise of 204,000 for October, setting off the worst bond-market rout in four months. And, yet, the drumbeat of easy-money blather from central bankers continues.
Why the disconnect? I think part of it is just that central bankers can’t help themselves. Bernanke and Yellen know nothing other than easy-money policy because they truly believe it is, on some level, saving the financial world. I believe that’s a bunch of malarkey, and that the economy is improving despite QE, not because of it.
But beyond that, you have to remember something very important: You simply cannot trust Fed policymakers to catch key economic and market shifts. They basically always screw it up when we reach key turning points, keeping policy too easy long after they should have tightened, and keeping policy too tight long after they should have eased.
Just look at the housing and mortgage crisis. Not one Fed policymaker was aggressive enough in identifying and attacking the bubble early on. And not one Fed policymaker foresaw the massive fallout its collapse would have in virtually every corner of the credit market and economy.
It’s not like the economy is growing by leaps and bounds. But every indicator I follow confirms that we have no need whatsoever for crisis-era monetary policy any longer. That’s why another “taper shock” is inevitable, and why these forecasts of a low Fed policy rate (and low equivalent policy rates in other major, developed economies) till kingdom come look woefully misguided to me.
I’ve shared some of my recommendations on how to protect yourself and profit from the major policy shift I see coming. But did you know it goes much further than just being out of (or short) the bond market?
You see, there are some sectors that can prosper in a rising interest-rate environment — especially those that are economically sensitive, such as aerospace. And there are select companies that can turn rising interest rates — and the increased volatility they will bring with them — into a potential profit bonanza.
One of the volatility plays I’ve focused on in my interest-rate-focused service just exploded to its highest level since October 2008. Another name that’s levered to the domestic energy boom, one that I’ve advocated buying in Safe Money Report, just hit a record high. If you’re interested in more specifics, just click here for details on how you can get on board.
Until next time,