Five+ Years of Fed Futility Laid Bare for All to See!

So the great monetary oracles at the Federal Reserve have concluded their latest conclave. Here is what we learned:

• The Fed announced it will lop yet another $10 billion off its quantitative easing (QE) program. That’s the fourth consecutive move in a row for the Fed, and it leaves QE at a pace of $45 billion.

• Policymakers sounded generally upbeat about the economy, noting that “growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement.”

• The post-meeting statement also noted that “household spending appears to be rising more quickly” even as “business fixed investment edged down, while the recovery in the housing sector remained slow.”

• Finally, the Fed proclaimed once again that inflation (at least the kind of Ivory Tower, “adjusted” inflation that none of us in the real world actually cope with) remains low. And it warned that “inflation persistently below its 2 percent objective could pose risks to economic performance.”

Wall Street always gets bogged down in Fed minutiae, and I’m sure these latest words of wisdom will be analyzed ’til kingdom come. Me? I boil things down like this:

It has been five-and-a-half years since Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and other casualties of the credit crisis imploded! We’ve been subjected to more than a half-decade of the Fed’s supposedly useful and appropriate medicine …

Unlimited money printing.

Zero percent interest rates.

Gargantuan bank bailouts.

Deliberate attempts to inflate stock and house prices.

And for what? What good has it REALLY done us?

More than $3 TRILLION in extra padding on the Fed balance sheet doesn’t look like it’s done much for the broad economy. Heck, on the same day the Fed oracles gathered, we learned that GDP grew just 0.1 percent in the first quarter. That was the slowest since the fourth quarter of 2012.

More than $3 TRILLION in extra padding on the Fed balance sheet doesn’t look like it’s done much for the broad economy.

The worst of it is, even that dismal reading was propped up by a massive surge of $43.3 billion in health care spending tied to the Obamacare rollout. That boosted the headline GDP number by 1.1 percentage points, the most in almost 70 years of record-keeping!

Sure, investors like Blackstone Group (BX) got nearly free money to invest in hundreds of thousands of houses. That helped inflate an “Echo Bubble’ in housing … but now the air is escaping from real estate once again.

“Don’t look to the Fed to save you! Look for ways to profit from successful companies in select industries and corners of the market that the Fed’s policies (and Washington’s!) haven’t ruined yet.”

Yes, corporations have been able to borrow money at ultra-low interest rates. But they aren’t using the lion’s share of that money to build factories, hire workers, or boost capital expenditures. Instead, they’re buying back stock and acquiring competitors! That can be good for shareholders. But for Main Street? Not at all!

And yes, select sectors of the U.S. economy that I’ve focused on, such as domestic energy production and aerospace, are doing well. But they have absolutely nothing to do with the Fed’s helicopter money. They have done well IN SPITE OF the Fed, not BECAUSE OF it!

Frankly, I have no idea why anyone puts any credence in anything these policymakers do or say! Alan Greenspan’s policies were an epic disaster, helping inflate huge bubbles in tech stocks and housing. Ben Bernanke’s “solutions” for those implosions haven’t worked, no matter what the Fed apologists on Wall Street say, and neither will Janet Yellen’s!

My advice? Don’t look to the Fed to save you! Look for ways to profit from successful companies in select industries and corners of the market that the Fed’s policies (and Washington’s!) haven’t ruined yet.

So where do you believe those opportunities lie? What kinds of investments have made you money in this zero interest rate environment? Do you think the Fed is doing the economy any good? Or is it all just smoke and mirrors? Go to the blog to get that conversation going!

OUR READERS SPEAK

Speaking of the blog, reader Richard B. said he isn’t happy at all with Apple’s (AAPL) moves to skate on taxes. His comment:

“If you want to profit from the opportunities of this great country, you should be willing to pay the taxes. They already are depriving thousands of people from decent jobs by making all of their products overseas where workers can be killed off from the infections they get manufacturing Apple’s products. Seemingly with immunity. I’ll invest with people who believe in America and are willing to support it.’

And Rob F. is one of many who thinks Bank of America (BAC) is yet another institution that has been feeding at the Federal Reserve’s trough … leaving nothing for the rest of us! His comment:

“Savers like us have been subsidizing them for 5 years and will continue to do so. Major banks borrow from me at less than half a percent, or from the Fed for nothing, then loan it to the Treasury at maybe 4 percent. No default risk, no underwriting or other costs. How else could the Fed and bankers generate billions in bank profits to shore-up balance sheets within a few quarters of near-death, while banks take billions in loan losses and fines?’

As for the Donald Sterling affair, many of you feel what he said is offensive and that he is getting what he deserves in terms of punishment. But you also noted that in our country, you have the right to free speech — even if what you say is foolish! Richard W. referenced a quote that sums up a key principal of the French philosopher Voltaire: “I disapprove of what you say, but I will defend to the death your right to say it.”

MARKET ROUNDUP

Here’s a quick recap of the OTHER important news of the day …

 How many characters does it take to say: “Twitter’s results stunk!”  There, I did it in 23! TWTR shares have dropped all the way to where they IPO’d in the first place.

The economic data parade continued today, with the Chicago PMI number surging to 63 in April from 55.9 in March. That easily beat the 56.5 forecast. ADP Employer Services said the economy created 220,000 jobs this month, up from an upwardly revised 209,000 in March.

That said, the GDP shocker pretty much killed any positive momentum those numbers might have generated. The 0.1 percent rise in Q1 growth was far below the 1 percent gain that was expected. Weak housing, weak exports, and weak capex spending by businesses all hurt growth.

There’s a special place in my heart for the city of Chicago, namely because I’m married to a woman from there! So I couldn’t help but highlight this story about how a developer is trying to revive a long-dormant project to build the tallest skyscraper in the U.S. there.

The project collapsed along with the housing and credit markets more than six years ago. But you never know. A dreamer is born every day in the real estate business!

Utilities have done well the last few months because investors are chasing yield again. Now, that yield-chasing trade — PLUS the merger mania trend — have combined to reward shareholders of Pepco Holdings (POM). The utility stock soared today after Exelon Corp. (EXC) agreed to buy POM for $6.8 billion.

Reminder: If you have any thoughts to share on these market events, don’t hesitate to use this link to put them on our blog.

Until next time,

Mike Larson