By John Whitefoot for Daily Gains Letter
Talking before the Senate Banking Committee during her first public appearance as Federal Reserve chair nominee, Janet Yellen said she plans to keep printing $85.0 billion a month and set no timetable for when the Fed will begin to taper.
Truth be told, the Federal Reserve has been, for the most part, pretty straightforward about when it will taper its quantitative easing policy: when the U.S. economy improves. For most, that means an unemployment rate of 6.5% and inflation at 2.5%.
At the same time, other scenarios have been floated about, including no tapering until the unemployment rate hits 5.5%, or better yet, the Federal Reserve begins to taper in early 2014, but continues to keep interest rates artificially low until, by some estimates, 2020. Really, what’s the rush?
And why should they? Since early 2009, the S&P 500 has climbed more than 160% and is up more than 25% year-to-date. The Dow Jones Industrial Average, on the other hand, is up 132% since early 2009 and is up 21.5% year-to-date. And it looks like the good times are going to continue to roll, because, in the words of Janet Yellen, “It could be costly to fail to provide accommodation [to the market].”
Take a few steps off the gilded sidewalk of Wall Street, and you get a different picture of the economy. Five years after the collapse of Lehman Brothers and hundreds of other banks, the global economy is still struggling to keep its head above water.
In the European Union, unemployment levels are at 11%; in Spain, it’s at 26%. In the U.S., the unemployment rate, currently at 7.3%, has been stubbornly high for years. Even in those countries that mostly avoided the crash, the economy isn’t that robust; in Canada, the unemployment rate is at an unjustifiable 6.9%.
During the third quarter, the eurozone economy grew at just 0.1%, while the 28-member European Union grew at just 0.2%. France, the eurozone’s second-biggest economy, contracted by 0.1%, and Germany, the area’s biggest economy, grew just 0.3%.
A year after Japanese Prime Minister Shinzo Abe promised to kick-start the world’s third-largest economy, things are still a little sluggish. During the third quarter, the Japanese economy decelerated at an annual pace of 1.9%; during the second quarter, it grew by 3.8%.
Along with its international peers, the U.S. economy continues to stumble along. And until things truly pick up, the Federal Reserve will continue to print money, and could conceivably even increase its quantitative easing purchases; this cannot help but devalue the dollar and fuel inflation. While gold and silver have fallen out of favor as of late, they will jump back on the investing radar when more rational thinking prevails.
It might be easy for the Federal Reserve to say we’re not in a bubble, since they hold the purse strings and can, by their own admission, direct the stock market. And as long as they keep interest rates artificially low, they can keep the stock markets artificially high.
http://www.dailygainsletter.com/economy/if-it-looks-like-a-bubble-and-acts-like-a-bubble/2120/