Heads up everyone! We could be on the cusp of yet another major policy shift from the Federal Reserve. And if you remember the massive “Taper Tantrum” from last year, you know just how important that could be.
Why am I making such a huge, important market call here? It all goes back to what I’ve been writing for a while, and particularly last Friday right here in Money and Markets.
I told you in no uncertain terms that many indicators of market complacency and risk-taking have gotten as bad — if not worse — than they were in 2006-07, and before that, 1998-99. Those two periods in market history marked massive turning points — from big gains in risk assets and massive complacency in markets … to the polar opposite.
Now, other analysts are saying the exact same thing. More importantly, policymakers at the Federal Reserve — the very policymakers who caused this situation in the first place — are finally chiming in too!
|“Low volatility, I don’t think, is healthy. This indicates to me a little bit too much complacency.” –Dallas Fed President Richard Fisher|
First, the Wall Street Journal published an article late in the day Tuesday titled “Fed Wary of Market Complacency.” The piece was written by Jon Hilsenrath, the Fed’s unofficial media “mouthpiece” for signaling policy shifts. It said the following:
“Federal Reserve officials are starting to wonder whether a tranquility that has descended on financial markets is a sign that investors have become unafraid of the type of risk that could lead to bubbles and volatility.”
And it went on to include the following incredibly important comments:
“Fed officials face a double-edged sword. Officials want to keep interest rates low to boost economic growth and hiring and to lift inflation from levels below the bank’s 2 percent target. But, having been burned by the risk taking that stoked the 2008 financial crisis, they are on the lookout for signs that the policies are having dangerous side-effects in financial markets.
“‘It is a problem of their own making. They can’t have it both ways,’ said Martin Barnes, chief economist at BCA Research, an investment-advisory firm. “If they want to sustain zero interest rates and push up asset prices, how can they expect to have that with no excesses and no risk taking?'”
I couldn’t have said it better myself, and I wish I could shake Mr. Barnes’ hand. The ridiculous over-speculation and out-of-control dumb lending and high-risk bond buying we’ve been seeing is all the result of the Fed’s own policies. But whereas once the Fed didn’t care or didn’t know about the harmful side effects, policymakers are now paying attention.
Second, in addition to the Journal article, two Fed policymakers grabbed the microphone this week to warn that 1) Interest rates will likely need to rise sooner, and by a larger magnitude, than observers believe and 2) Volatility is way too low and complacency is way too high.
Specifically, Kansas City Fed President Esther George warned about rising food, rent, and tuition costs, as well as excessive leveraged corporate and subprime auto lending. She added that while “a gradual path for the federal funds rate is suggested by the FOMC’s projections … It will likely be appropriate to raise the federal funds rate somewhat sooner and at a faster pace.”
Dallas Fed President Richard Fisher also added to his recent warnings, saying, “Low volatility, I don’t think, is healthy. This indicates to me a little bit too much complacency.”
Back in the old days, investors wouldn’t care as much about the Fed’s warning on complacency or market volatility. That’s because the Fed had only two official policy goals: Keep inflation as low as possible and employment as high as possible.
But the credit, housing and mortgage crisis changed everything. The Fed completely missed the mark there, failing to foresee and head off the biggest financial and economic crisis since the Great Depression. So now it knows that to cover its political backside, and to actually try to get things right for a change, it needs to take action to keep risk taking from getting any more out of control than it already is.
Bottom line: We already had enough decent economic data, and worrisome news on the inflation front, to tilt Fed policy in a more hawkish direction. Now — on top of that — we have the Fed saying that it’s worried about excess complacency and excess risk-taking.
That means we’re facing a new, clear and present danger … the danger that policy gets even tighter, with more aggressive tapering of QE, earlier-than-expected or bigger-than-expected interest rate hikes, or both.
So if you haven’t already done the following, do so now:
First, get the heck out of long-term bonds. I don’t care that they rallied in the first few months of this year. Last year was the worst for bonds in a decade and a half, and we should see renewed selling if bond volatility and short-term interest rates pick up.
Second, take some profits on stocks, and get out of sectors vulnerable to rising interest rates or rising rate volatility. Then stick only with the strongest stocks … in their own private bull markets … that have high Weiss Ratings for safety and performance.
You can find my best picks in Safe Money Report, and I’m pleased to report that many of them are hitting multi-year or all-time highs this year! Heck, one name in the energy transportation space has almost doubled in just the eight months since I first recommended it.
Third, favor the U.S. dollar versus the euro. Our central bank is more likely to curtail artificial stimulus and raise interest rates long before the European Central Bank does. In fact, the ECB just launched new easing measures yesterday.
I covered that in more detail in yesterday’s afternoon edition, which you can find on the Money and Markets homepage. But in short, they cut one key interest rate into NEGATIVE territory, opened the door to “Euro-QE,” and took other steps to boost bank lending and drive the euro lower over time.
One of my favorite ways to play a rising dollar and falling euro can be found right in the pages of Safe Money. So call us at 800-291-8545 or click here if you want precise “buy” and “sell” signals there.
I will leave you with one final piece of advice: Complacency and inertia can be your worst enemies as an investor.
Until next time,