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 Chairman
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
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:
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