Question: When is an unprecedented economic event tantamount
to a non-event? Answer: When another Fed
intervention is announced.
The U.S. Federal Reserve bank announced this week the
commencement of a new round of Treasury purchases to the tune of $45 billion a
month to replace the expiring Operation Twist.
This is in addition to the recently launched QE3 program that committed
the Fed to buying $40 billion a month in mortgage-backed securities. The grand total of these central bank
interventions amounts to some $1 trillion a year in government debt markets.
Financial markets were largely unimpressed with the
announcement of QE4, essentially reversing what had been an impressive rally in
stocks on the day of the Fed’s policy meeting.
This marks the second time in a row that investors have basically yawned
at the commencement of another quantitative easing (QE) program, and for good
reason: each successive QE has been followed by diminishing returns in the
stock market. The following graph
illustrates the diminution of returns since QE1 was expanded in 2009.
Aside from announcing a new round of bond buying, Fed
Chairmain Bernanke also announced that the Fed has modified its guidance,
noting its ultra-accommodative stance will remain in place until the
unemployment rate falls below 6.5% and inflation projections remain no more
than half a percentage point above 2% two years out. This improved upon the Fed’s previous
assertion that low rates would continue until 2015.
The purpose behind the Fed’s Treasury purchases isn’t as
much to directly stimulate economic growth as it is to keep interest rates at
rock bottom until real estate – the chief economic lynchpin – can fully
recover. The Fed’s hope is that the
housing recovery which has been slowly gaining traction will accelerate in 2013
and beyond. There are good reasons,
however, for believing this hope will prove misleading.
The above graphic shows the decreasing effectiveness of the
Fed’s quantitative easing programs over the last 3+ years. You’ll notice that 2009 saw the biggest gain
in the stock market of 50%, followed by QE2 in 2010 which saw a 30% gain in the
S&P 500. This was followed by
Operation Twist in 2011 which ushered in an 18% gain. All of these gains were helped by the
cyclical factors behind the Fed’s control.
For instance, the powerful 10-year cycle was peaking into
late 2009. This accounted for much of
the gains equities saw that year, along with the fact that the market was
coming off a major “oversold” condition following the credit crash. Between 2010 and 2011 the 6-year cycle was
peaking, which helped the market maintain is upward trend in those year. History has shown that Federal Reserve
interventions are most effective when a major yearly cycle has either just
bottomed and has freshly turned up, or else when a major cycle is in its “hard
up” phase prior to peaking. In years
when the broad market trend was down, or when no major cycle was peaking, Fed
interventions aren’t as effective.
The last of the major yearly cycles to peak occurred just
over two months ago with the peaking of the 4-year cycle. Moreover, according to the late Bud Kress of SineScope, a major quarterly cycle is
scheduled to peak in late March/early April next year. This is what Kress referred to as the
“Catastrophic Cycle” in his writings. He
referenced it as potentially beginning “a 1 ½-year sustained decline a la
1973-74 tantamount to death by a thousand cuts.” He added that this will happen for “the first
time since the beginning of the 120-year Mega Revolutionary cycle which
heralded the beginning of the Industrial Revolution in the mid 1890s.”
In one of his final SineScope
missives before his passing, Mr. Kress also made the following observation
worth mentioning: “The fourth and final
30-year mini economic super cycle peaked at the 1999/2000 turn of the
century. It produced an all-time high in
the S&P of 1,535 which began a 15 year secular bear market scheduled to end
with the bottom of the 120-year Mega Cycle in the fourth quarter of 2014. Halfway in 2007, the S&P achieved an
effective double top at 1,565 which began the secular bear market decline which
has yet to be equaled.”
Kress emphasized that the years 2013 and 2014 should prove
to be economically disappointing ones.
He pointed out that even with the Fed’s constant intervention in recent
years the economy has barely nudged forward since the credit crisis. Despite record outpourings of liquidity the
economy has basically been treading water for the last four years. Does this not speak to the massive
undercurrents of long wave deflation that are currently in force?
Indeed, the Fed’s notable failure to reverse the economic
tide provides strong circumstantial evidence that the long-term deflationary
cycle Kress wrote about for many years is a reality.
2014: America’s
Date With Destiny
Take a journey into the future with me as we
discover what the future may unfold in the fateful period leading up to – and
following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my previous work,
The Stock Market Cycles, I expand on
the Kress cycle narrative and explain how the 120-year Mega cycle influences
the market, the economy and other aspects of American life and culture. My latest book, 2014: America’s Date
With Destiny, examines the most vital issues facing America and the global economy in
the 2-3 years ahead.
The new book explains that the credit crisis of
2008 was merely the prelude in an intensifying global credit storm. If the basis for my prediction continue true
to form – namely the long-term Kress cycles – the worst part of the crisis lies
ahead in the years 2013-2014. The book
is now available for sale at:
Order today to receive your autographed copy and
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