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Martin here with a quick reality check!
If you think this week’s surprise move by the Fed — to continue its massive bond-buying operations for a bit longer — was “a big gift” for investors, think again …
The facts tell a very different story indeed:
Fact #1. The mini-rally it spurred in Treasury- bond prices on Wednesday was just 1.6 points.
Fact #2. That rally was a tiny fraction of this year’s major decline so far — over 21 points. It doesn’t even begin to reverse the obvious damage to investor portfolios.
Fact #3. In all of Federal Reserve history, it has never been possible for the central bank to sustain a rally in Treasury bonds with extreme easy money — or by willy-nilly buying up bonds. The only Fed policy that has ever sustained a healthy bond market is based on precisely the opposite approach.
Fact #4. History also proves that the Fed’s attempts to keep interest rates below the inflation rate can only lead to a massive interest-rate explosion. (See “The Chart of the Century.”)
Fact #5. Most foreign and domestic investors are thumbing their noses at the Fed’s bond-buying operations: They’re continually taking big sums of money out of the bond market. (See “Beware of the Denial That’s Gripping Wall Street.”)
Fact #6. Most important, while Wall Street initially welcomed the Fed’s move to continue its quantitative easing (QE) program, serious observers say it’s a huge blunder.
Martin Feldstein, chief economic advisor under Reagan, says the Fed simply must act — sooner rather than later.
Esther George, president of the Kansas City Fed, says the Fed’s bond purchases raise the risk of inflation and threaten financial instability.
And Weiss Research interest-rate specialist Mike Larson writes:
“The Fed just missed the last opportunity it had to exit from the disastrous QE trap without causing utter chaos in the bond market.
“The market was prepped for a taper, and the time to act was now. Instead, the Fed chickened out, deciding to continue its $85 billion-per-month pace of buying Treasuries and mortgage-backed securities (MBS) for a bit longer.
“This merely creates an even shakier bond bubble and drags the Fed deeper into the trap of its own making.”
Mike argues that the Fed will have to cut back its bond buying program very soon anyway; and when it does, it will cause still more shock and awe.
Keep your cash short term.
Continue to avoid long-term bonds like the plague.
And, if anything, use this rally as an even better opportunity to buy investments designed to profit from falling bond prices and surging interest rates.
Good luck and God bless!