image: Fed Chair Janet Yellen at the March 2016 Fed Open Market Committee press conference
With its decision to stay the course and once again postpone a hike in interest rates, the Federal Reserve has unleashed a firestorm of reaction from professionals. One economist and an asset manager can only manage to express their displeasure in metaphor. And one famous bond salesman finds himself hard put for any words at all.
The essence of their criticism, bordering on outrage, boils down to the sheer impotence of central bankers worldwide. In the last several years, every time they’ve tried to jump-start their respective economies, they’ve failed. The noted outspoken economist Marc Faber likens them to alchemists, who, no matter how they try to make gold, fall flat on their faces. According to Faber, while even alchemists put something of value in their concoctions, “[C]entral banks are just mixing water, in other words, paper money, and the results cannot be a favourable outcome in the long run.”
Meanwhile, Steven Scott, of Longboard Asset Management, thinks the course the Fed has charted is nothing short of catastrophic, warning of the more than $230 trillion in global debt he likens to “a massive star exploding into a supernova.”
The monetary tampering of central banks has ignited this debt explosion. They’ve indulged their respective economies in unprecedented levels of quantitative easing, zero interest rate policies, and the implementation of once-unthinkable negative interest rates. The U.S. alone is strapped with more than $63 trillion in combined public and private debt. Compare that with just over $3.5 trillion currently circulating. When you consider these particular dollars have been lent and borrowed more than sixteen times, you realize how the leverage stimulated by this debt has continued to skyrocket.
Central banks have stirred such a disruption of conventional economic principles, according to Scott, that investors are now turning to stocks for yield. What else can we do when bonds currently yielding less than two percent?
Bond maven Bill Gross said he was “choked with emotion and hardly able to speak” over the Fed’s decision. Though Fed Chair Yellen’s and Vice Chair Stan Fischer’s previous hawkish comments led investors and the general public to believe the central bank would impose two rate hikes this year, ultimately they blinked. Gross believes Yellen has sheepishly been hiding behind her oft-quoted excuse of data dependency for the Fed’s inaction.
“So they call it data dependent. I think it’s more market dependent.” An unsettling thought; the horse isn’t just behind the cart, it’s following it. But that shouldn’t be the role of the Fed; their task isn’t to wait for something to happen, it’s to make it happen.
As private investors, you and I can wait confusedly on our own. We don’t need the Fed’s help to embrace hesitancy. Wouldn’t it be a better idea, though, to invest in hard assets like real estate and physical gold instead of waiting for a magic stock or bond pill through the intervention of an unmoored Fed? Thankfully, precious metals is one asset class the Fed’s incompetence can’t torpedo.