- No tightening. We recently suggested that - contrary to market jitters - the Fed is NOT about to tighten. In the jargon of our Economic Clock®: she is not about to create an excess demand for money. She would do that by, for instance, SELLING bonds into the system, i.e. "giving bonds and getting money". Hardly any danger of that at this eve of America's improving Economic Time® !
- Stronger dollar demand. In fact, if she were to just "stand still", i.e. not touch the bond market, then people would keep thinking that higher rates are on the way. Given the structural mess in that welfare museum, Europe, and in that regulated mausoleum, Japan, expect their rates to stay low for a long time. This means that more and more people will buy the dollar. Well, how else could it strengthen? The point is that such dollar purchases inject more money into the US system, further supporting our conviction that the current excess supply of dollars will remain for a good year or more. Good for the US stock market.
- Flat Fed balance sheet. You all have seen that impressive picture in which the S&P 500 is plotted against the Fed's balance sheet, right? Amazingly, even when the Fed's balance sheet just stood still (2009 - 2010; 2011 - 2012) the market still remained firm if not rose. In other words, there was still an excess supply of money even though the Fed was not expanding her balance sheet. And this excess supply of money gave rise to more market gains, i.e. money chasing assets such as stocks..
- Investment implication. Keep buying the U.S. market, especially on dips. Not only is her Economic Time® improving: that should give rise to even healthier earnings going forward. Furthermore, expect MORE money to enter the system on account of foreigners wanting to buy more and more dollars. That exacerbates her excess supply of money. Finally, even when the Fed's balance sheet does NOT grow, America's market will keep prospering on account of that excess supply of money simply not going away: households keep nurturing their balance sheets, meaning that domestic demand remains contained. So there is plenty of money around to keep chasing assets - even if the Fed herself quit QE3 just this Wednesday. Read more
Dr. Enzio von Pfeil
A seasoned global economist. Enzio von Pfeil’s skill lies in understanding macro-economics, the business cycle and business operations. Hong Kong-based Enzio von Pfeil has an international education which culminated in studying inter alia under Prof. Friedrich von Hayek. He has a distinguished 34+ year career (US, Germany, UK and Hong Kong) in macro-investment economics.
His understanding of currency, commodity, bond and equity movements as they relate to socio-political developments across the global economy, underscores the authority and integrity of his Economic Clock® Blog.
Author of five books, and with a 30-year global career as an investment economist in the USA, Germany, UK and Hong Kong, Enzio von Pfeil is a professional speaker and commentator on Reuters, Bloomberg and ChannelNews Asia on economic impacts on markets, industry sectors and corporations.