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Townhall
Finance
Bernanke's
Bumpy Ride -- Investors Beware
By Larry Kudlow
Jun 29, 2013
No
matter how many monetary officials try to
sugarcoat it with damage control, the fact remains that the Ben
Bernanke Fed
wants to end its quantitative-easing bond-buying operations over the
next year.
That was Bernanke's statement at his last press conference, and I've
seen
nothing to contradict it.
As
everyone knows, stocks and bonds collapsed
right after Bernanke let the cat out of the bag. Fortunately, markets
have
stabilized since then. But my hunch is that unless the economy really
falls
back into a quasi-recession, the Fed is going to go ahead and end its
bond
purchases.
The
central bank will more than likely begin to
taper in September. And it will do so based on roughly 175,000 new jobs
each
month, which is consistent with a 2 to 2.5 percent economy.
But
as the Fed implements this policy, there's
going to be a lot more volatility in the financial markets, with
significant
downside risks for stock prices and upside potential for longer-term
interest
rates.
Investors
beware. The second half of this year
could be a bumpy ride.
Now,
nobody asked my opinion on this. But I
wish the Fed would leave its current accommodative policy in place,
rather than
taper down its quantitative easing. Why? Let me begin with the crashing
gold
price. Although gold has been dropping from $1,900 for a couple years
now, it
has fallen several hundred dollars recently to around $1,200. Gold is
an
important market-price signal of money policy and inflation, the latter
of
which has dropped to 1 percent year on year. So today's gold price is a
deflationary signal.
The
strong dollar reinforces the gold
indicator, as do weaker commodity and metal prices. They're all telling
the
central bank to go very, very slowly in unwinding QE.
Also,
this is only a 2 to 2.5 percent economy.
Market monetarists are focusing on a soft nominal gross domestic
product rate,
which is less than 4 percent. That's another signal that the Fed should
not
tighten its cash-injecting money-supply policies. As the monetarists
well know,
a slowdown in Fed bond buying will translate to a slower rate of growth
for the
monetary base and likely for M2. The falling turnover of money, or
velocity, is
already a cumbersome process. But Fed tightening will make this story
even more
difficult.
And
if the Fed does what it says it's going to
do, there certainly is going to be an intermediate bear market in
bonds. As a
rough approximation, 10-year Treasuries, which already have gone up
nearly 100
basis points to 2.5 percent, will probably rise another 100 basis
points to 3.5
percent. That, in turn, is going to weigh down stock market valuations.
And it
could well have a negative impact on the economy.
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the rest of the article at Townhall
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