$1.2 TRILLION !!! It is an unfathomable amount of money and we talk about it as casually as pocket change. Were I to hand you $1 bills at a rate of one per second, 24 hours per day, it would take 12 days to hand you $1 million. It would take over 32 YEARS to hand you $1 Billion. How can you find meaningful context for trillions of dollars? The Federal Reserve has now committed to take their infusion of cash to over $3 trillion. That’s equal to 25% of the entire US GDP. It’s killing me not to end every sentence in this paragraph with several exclamation points!
The Federal Reserve’s balance sheet has historically run about $200 billion to facilitate open-market activities like a good ol’ coupon pass. In September 2008, the balance sheet grew to $900 billion. It was $2.1 trillion at year-end. This is so much money that pundits have given up quoting Sen. Everett Dirkson who said, “a billion here, and a billion there, and pretty soon you’re talking real money.” They’ve stopped saying it because it’s not true anymore!
On Monday, it was announced that the Financial Accounting Standards Board (FASB) is considering modification of the mark-to-market rule that would provide flexibility in valuing performing assets for which there is no ready market. This is a hugely important development in our opinion and long overdue. This adjustment should not meaningfully impair transparency, in our opinion, but will stop the unnecessary erosion of bank’s balance sheets and capital ratios. They’re a little late, but better late than…
The great caveat to our 2009 economic and market forecast was that our rationale could be dramatically changed by future, unimaginable government intervention. Well we have it and the current downturn in the economy will, in our opinion, be greatly mitigated in its future decline by these actions. We believe that the floor in housing prices now will be much closer at hand. We believe that repair and recovery to credit markets will be swifter. These new actions make it more likely that the March 6th 6,469 low on the Dow will be to be the bottom of this remarkable Bear Market.
Markets do not move in straight lines! We believe that although this rally may continue for a good bit, we will have addition weakness and testing of this bottom as a base builds.
If you went to cash, it is time to plan your path to get invested again. You don’t need to go hog-wild buying. But the current intervention just increased your risks of missing the bottom and being left behind. We are working with clients on these plans. For example, you may choose to inject 20% of your equity allocation on the next move below 7000 or by May 1st whichever comes first. The next 20% can go in by June 15 or on any dip below 6800. The structure itself matters less than having a plan. Without a plan, emotion will lead onto the wrong conclusion every time.
For today, we are relieved but by no means suggest we are out of the woods. We are not ready to jump whole-heartedly back into bank stocks or consumer discretionary companies. Caution and a clear investment discipline need to continue to be your constant guides.
Looking ahead, we fear inflation. It maybe that Dr. Bernankenstein has created a monster beyond his control. Specifically, as the Fed has bought tons of mortgages and other awkward and difficult to hold securities making it the largest junk-bond manager in history, we worry how it will get rid of these assets without causing meaningful rate increases. Will they be able to sell billions of dollars of bonds to the markets without driving prices lower and thereby driving yields much higher? Certainly they will want to increase short-term rates as they see signs of economic improvement. They will want to try to be in front of the inflationary swell to keep swell from becoming tsunami. This strikes us as a Herculean task against a Congress concerned with re-election,desirous of keeping the spigot open through whatever next election cycle may present, and screaming that the ‘economy is still too fragile.’
We all know that if you lie with dogs, you rise with fleas. Washington is now the financial capital of the world, and monetary policy will become ever more political. A bright spot is that as asset values become inflated during periods like this, and stocks are one of those asset classes.
Hang in there!