Thursday, April 12, 2012
Resurgent Inflation Hawks Question Fed's Next QE
Helicopter Ben may be getting impatient with the Fed's lack of unanimity. Senior Fed officials are now openly stating they will not support further monetary easing without first seeing evidence of the broader economy's deterioration. Couching it in language like "we'll do all we can to support growth" is political cover. I read these statements as a sign that the Fed minutes showing how some Fed members were questioning the QE approach weren't just a smokescreen to fool investors. There are real inflation hawks at the Fed who are willing to stand against the Chairman's predilection for monetary creation.
The Fed is now torn between keeping the exit strategy for ZIRP in mind and keeping the monetary spigot open so the Chairman can deliver on his "printing press" promise (thus immortalizing his pro-inflation PhD thesis). This potential paralysis is a salient indicator for investors. It means the hawkish holdouts who question further stimulus can try to delay Ben's next QE round until the deflationary depression signs are too obvious to ignore. Those deflationary signs may become very obvious if further European market troubles spill over into US equity markets.
The lesson I draw from all of this seemingly convoluted reasoning is simple. A deflationary crash followed by a hasty monetary attempt at reflation is the most likely scenario I can foresee based on this tug-of-war between Ben's pro-inflationists and the Fed's anti-inflation hawks. This is why I have reserved a large amount of cash in my portfolio for large and fast purchases of equities once US stocks take the severe discounts I expect to see in a market crash. Any stocks I do decide to purchase in the event of a crash must be aligned with sectors that will respond well to a hasty Fed attempt at reflation, and I've concluded that hard assets (minerals, energy, agriculture) and sectors that support them (railroads, pipelines, some utilities and service providers) are aligned with my own knowledge base and risk tolerances.
I cannot predict the future with any certainty and I could be wrong; any wrong move I make will hurt me financially. If high inflation comes first, contrary to my expectations, I'd be forced to buy things like TIPS and hard assets at their very high current valuations. The difference between me and most preppies on Wall Street is that I'm actually thinking through a methodology for surviving a hyperinflationary great depression.
Nota bene: None of the above discussion is actionable advice for any investor. Consider it a form of entertainment to watch me think out loud.