Fed to Stand Pat – Still Operating on Powell’s Dramatic Change

What to Expect Today

The Federal Open Market Committee (FOMC) is going to do absolutely nothing today at 2:00pm regarding interest rates. The market is expecting nothing and nothing it will get. Any other action would be a total and complete shocker. In fact, at this point, the market isn’t pricing in any FOMC action until the very end of 2020 where a rate cut is expected. Keep in mind that market expectations even a quarter out don’t amount to much, let alone a full year out.

With stocks so close to all-time highs, this continues to be reminiscent of 1995 when the Fed came from an overly restrictive monetary policy in 1994 to realizing they screwed up and quickly played catch up. Stocks had long understood and priced this in with 1995 being one of the all-time great investing years in modern history.

Right after the Fed announces their decision,the usual parsing of every single word and change from the last statement on October 30 will take place. In this regard, I do not expect much in the way of market moving news.

Invoking Paul Volcker

On October 30, Powell & Co. basically said that they were not going to raise rates again until inflation at least met their 2% target. Moreover, they opened the door for inflation to exceed their target before they took action. In other words, the Fed is now okay with inflation running a little “hot”. How almost ironic that in the period that the FOMC not only begs for inflation, but wants it “hot”, former Fed Chair Paul Volcker passes away. Many will remember Volcker as the Fed savior in the 1980s who kept raising and raising interest rates to combat what had been very troublesome inflation. Some will remember those W.I.N. buttons which stood for Whip Inflation Now. Short-term interest rates rose to almost 20%. I personally remember money market rates in the teens as I first invested my bar mitzvah gifts before moving to stocks. You can look at the chart below to see the history of short-term interest rates controlled by the Fed.

I remember my grandfather buying a lot of triple tax free New York City municipal bonds in the late 1970s and early 1980s which were yielding more than 25% as the city was on the verge of bankruptcy. He told the family one holiday that the United States would never, ever allow the most powerful and prominent city on earth to default. I had no idea what it meant at the time, but he was certainly right. As the years went on, he would see bond after bond be called away and/or finally mature in what he always said was the investment of a lifetime. Until he passed in 1999, he would often complain about the paltry single digit yields from newer muni bonds although he ended up buying Mobil with its fat dividend yield with some of the proceeds.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks near all-time highs and significant upside progress over the past month, the bulls have even less dry powder than normal, not to mention how poorly stocks have done under Jay Powell on Fed day. In his short tenure as Fed chair, Powell already has the weakest stock market performance of any Fed chair in history on Fed day although stocks did rally on October 30th.

Below is a wonderful chart courtesy of the great Rob Hanna from Quantifiable Edges @quantedges which shows just Fed day stock market performance by Fed Chair. While Powell’s tenure is young, it is not enviable for the bulls.

Countdown to a Trump Tweet

It’s certainly no secret that the President isn’t the biggest fan of Jay Powell, even though Donald Trump appointed Powell as Fed chief. Trump has been as misguided as Powell when it comes to interest rates. The President has been publicly trying to shame the Fed into copying the failing and disastrous European model for negative interest rates, something I hope and pray never, ever happens in the U.S. Low or negative interest rates are certainly not an economic panacea.

On the other hand, whether intentional or by accident, President Trump has been ingenious in creating a natural scapegoat for any potential economic weakness before the election. If the economy strengthens over the coming quarters, Trump will certainly take credit for it, in spite of his perception that the Fed had been working against him. If the economy weakens from here, the President will obviously blame Powell & Company as Trump has been publicly campaigning for more aggressive action by the Fed. In either case, Trump likely wins in the court of public opinion.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Jay Powell began his term as Fed chief by essentially saying that enough was enough and he wasn’t going to be beholden to the markets. And to his credit, he did live up to that statement all the way to January 2019 when his famous or infamous 170 degree turn took place after stocks saw that very minor decline of “only 20%” in short order. Then, much to his supporters chagrin, Jay Powell turned into Janet Yellen, Ben Bernanke and good ole Al Greenspan all wrapped up into one. He waved the white flag, much to President Trump’s delight, and declared that he was simply going to give the market what it wanted going forward. The last part is an exaggeration, but that’s effectively what he did.

Something must happen when one becomes the most powerful central banker on earth. The term “not on my watch” is taken to a new level. No one wants to be the one who kills the golden goose of a rising stock market, extended business cycle if you can even use that term anymore and general prosperity. And this all happens with the quiet understanding of “whatever it takes”. So many of us have poked fun and criticized former European Central Bank Chair Mario Draghi for essentially saying the exact same thing when it came to saving the Euro currency. At least he had the gumption to overtly state it.

The Fed doesn’t want to upset the financial markets. And that’s understandable. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did. A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

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And the 5th Pullback since The Bottom Ends

On March 21, I penned a piece calling for the 5th pullback since the rally began. I used words like “brief” and “mild” to describe what I thought was coming before the next rally began. As with the previous four pullbacks, all we saw was essentially two days of slight weakness before the bulls roared back.

And roar back they did.

Right before Janet Yellen released her speech on Tuesday, I did an interview with CNBC India regarding the Fed raising rates as well as the market’s short-term prospects. I want to thank Chair Yellen for listening to me and the market when offering such dovish (benign) comments regarding the need to raise interest rates right now.

The stock market certainly loved what Yellen had to say as the fifth pullback abruptly ended in a hurry. By the time the closing bell rang, the Dow Industrials, S&P 500 & S&P 400 all were back to the levels seen before the 2016 began. Only the Russell 2000 and NASDAQ 100 are left to regain lost ground, which should happen sooner than later.

I keep referring back to the “dark days” of 2016 when I was essentially the only bull left out there. I remember at both the January and February lows how CNBC and Fox Business couldn’t find but a few people to offer even neutral views, let alone bullish ones. My Twitter feed was overwhelmed with calls for a new bear market and a crisis worst than 2008. I am just wondering what happened to those folks. I have seen a few people who disavowed the rally and recommended selling the whole way up suddenly say that they successfully bought the bottom, in hindsight of course.

Anyway, stocks are seeing some very nice upside breakouts, but for me, I don’t think this is the greatest time to add risk to a portfolio. If you weren’t smart enough to add at lower prices, I wouldn’t compound your mistake with potentially another. There will be another short-term pullback sooner than later when people with cash will have that opportunity. The problem will be that they won’t take action at that point because they’ll look for a much deeper decline. If you absolutely must invest, I would look at the laggards here and have a solid exit plan before buying.

That’s it for now as I am heading to NYC for the day. Tomorrow, I will look at the sectors, commodities and currencies as there are some really nice short-term opportunities now.

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Will the Doves Assume Control of the Fed Today?

It doesn’t even feel like the world has recovered from the hangover left by Janet Yellen and the Fed after their ill-fated and poorly timed December interest rate hike, but now, it’s FOMC announcement day again. However, unlike December when a rate increase was widely expected, the Fed is not going to take any action today.

The Fed’s post-announcement commentary is what everyone will sink their teeth into for clues of future rate hikes or the committee’s possible move back to the dovish side. With stocks correcting sharply in January along with the global economic uncertainty, it’s very hard to believe that the hawks will win out today in any way, shape or form. Given the Fed’s hints at four interest rate increases in 2016 and the markets only pricing in one or two rate hikes, it will be interesting to see how that gap is bridged.

As with previous announcement days, the model for today is plus or minus 0.50% for the S&P 500 until 2pm before a few sharp moves are made and then a rally into the close. That’s the historical trend 75% of the time.

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All Signs Point to a Horrifically Wrong Decision by Yellen & the Fed

FINALLY, or YET AGAIN, it’s FOMC statement day. Unlike every meeting since 2007, I do believe the Fed is wrongly going to raise short-term interest rates for the first time since 2006. Since 2008, my thesis has been and continues to be that the Fed should not raise interest rates until the other side of the next recession. This is your “typical” post-financial crisis recovery that’s very uneven. It teases and tantalizes on the upside and frustrates and terrorizes on the downside. Another recession, albeit mild, is coming over the next few years. That’s okay. We’ll get through it. On the other side of it, our economy should get back to trend or average GDP growth, not seen since pre-2008. This could also coincide with Europe getting its fiscal act together after another sovereign debt crisis.

I have heard some pundits use the word “credibility”. The Fed needs to hike rates to either preserve or establish credibility. I am sorry, but that’s idiotic and doesn’t need any further rebuttal. Some believe that an unemployment rate of 5.0% represents “full” or “maximum” employment and that a rate hike is necessary to cool the jobs market. Another reason I totally dismiss as unfounded. How about the labor participation rate at 62.40%, a 38 year low?!?!

From my seat, it looks like an 80% likelihood and the markets are expecting the rate hike. China has stabilized, but is far from fixed. Europe is teetering on recession but that’s been the case. The dollar is well off the highs, but the bull market has at least another 20% left on the upside.

This will be the first rate hike ever with inflation under 1%.

This will be the first rate hike ever with the annual social security COLA at 0%.

This will be the first rate hike ever with wage growth needing to jump 100% to hit the Fed’s target.

This will be the first rate hike ever with industrial production on the verge of recessionary levels.

This will be the first  rate hike ever with GDP barely 2%.

This will be the first rate hike ever with inflation expectations close to 0%.

This will be the first rate hike ever with retail sales closer to recession than escape velocity.

This will be the first rate hike ever with non-farm payroll job growth continuing to decelerate.

Where’s the fire?!?!

What’s the hurry???

I could go on and on, but I think you get the picture.This is not a normal first  rate hike where the Fed is trying to tamp down inflation and/or worry about an overheating economy. This is simply to move off the 0% emergency level and get going. It’s also the wrong decision.

MV

Money velocity, which tells us how often a dollar is turned over during a given period of time, has been in a steady downtrend since 1998 and stands at the lowest level since records were kept. See the chart above. It saw a small rally from 2003 to 2006 which the Fed quickly extinguished with rate hikes. Now they are going to raise rates with this important indicator at all-time lows.

Unfortunately, I do not believe this is a one and done deal for Yellen et al. With the voting members of the FOMC changing substantially in 2016, the Fed will become much more hawkish next year. I forecast a .25% rate hike every quarter next year in March, June, September and December to end 2016 in the 1.375% zone.

Finally, the historical trend for today is to see the major indices trade in a +0.50% to -0.50% range until 2pm est and rally into the close.

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One Door Closes Another Opens

On Wednesday, to no one’s surprise, Janet Yellen & Co. ended the Fed’s 5+ year experiment of purchasing assets in the treasury and mortgage backed securities market, also known as quantitative easing (QE) or money printing. I won’t rehash all of the reasons why I continue to believe this is a misguided strategy, but it is.

Before the ink was even dry on the statement, the Bank of Japan completely caught the markets off guard last night with another ramp up of their own QE, buying more bonds, extending maturities and really ramping up their purchase of stocks using ETFs and REITs. I have said this since Abenomics (Japan’s version of our QE but on steroids) was launched in Japan, this will go down as the greatest financial experiment in history. Japan is going to print until the world runs out of ink!

And the European Central Bank (ECB) isn’t far behind.

Many are left to wonder what our markets and economy are left with in a post QE America. In a vacuum, the end of QE is headwind, however, with Japan going on even more steroids and the Europe about to begin QE, I don’t view it as a negative just yet. That time will come down the road.

For now, my thesis remains the same. Markets gave us a golden opportunity to buy a few weeks ago and I hope people took advantage of that. It was easy in real time and I wrote about the bottoming forming as it took place. The bull market is old, wrinkly,  but still very much alive. Rallies should get more selective from hereon and it will be interesting to see where leadership comes from.

Markets really need to see the high yield sector step up and rally! Odds favor it will.

Happy Halloween! One of my favorite holidays. Can’t wait to take the kids out tonight and then come home for some adult beverages.

Enjoy the weekend and be safe…

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Textbook Consolidation Ends

Late last month, I wrote a piece concluding that stocks looked a bit tired at all time highs. Nothing terribly damaging, but they were in need of some rest. Routine, normal and healthy pullbacks can come in different forms. The easiest way for stocks to digest is to decline 2-5% fairly quickly, while another way is to see sideways movement with a slightly downward tilt for a period of weeks.

The Dow Jones, S&P 500 and Nasdaq 100 all saw the latter from September 3 through the 15th. The S&P 400 and Russell 2000 saw the former with modest declines of 2.65% and 3.70% respectively. With the Dow, S&P and Nasdaq 100 all hitting fresh highs, it’s very hard to argue that the recent pullback is not over. Action in the S&P 400 and Russell 2000 are definitely cause for concern with the Russell living on bull market life support now.

There have been a number of recent headwinds that will dissipate one by one through month end. Markets interpreted Janet Yellen’s announcement and press conference dovish and hawking depending on who you listen to. Yields on the five year note are up 22% over the past month while the 10 year has risen by 14%, certainly not a dovish anticipation or response. Stocks, however, are up 3%, certainly not hawkish and not only responded positively after 2pm on Fed statement day,  but also followed through the day after. With many more headwinds to overcome by month end, it will be a very bullish sign if stocks can hang in within a few percent of new highs.

With the Fed gone for now, markets are squarely focused on Alibaba’s much ballyhooed IPO set for September 19. It certainly looks like institutional investors have raised the necessary cash to fund the $20+ billion offering by selling tech stocks into the Fed meeting. Additionally, Scots head to the polls to vote on leaving the UK, a move that I believe would catastrophic for their economy.

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Much Ado About Nothing from Yellen & Fed Today

My how time flies…

It’s Fed decision day again with Janet Yellen set to announce another $10 billion cut from bond purchases, keeping the FOMC on pace to wind down QE Unlimited later this year. After the 2pm announcement, Ms. Yellen will head over to the always entertaining (NOT) press conference.

One thing I am sure of is that the Fed chair will not commit another rookie, foot in mouth, Joe Biden esque’ gaffe by committing to a specific timeline for interest rate hikes. Everyone knows that rates hikes are coming next year although I continue to disagree 100% as I have since Bernanke first floated the QE taper trial balloon in May 2013.

Until the Fed’s statement is released, we can expect a very quiet stock market, +-0.50%, as we historically see. After 2pm, it’s the norm to see some fireworks in both directions although the trend says that stocks should finish in the black on the day.

For a change, I am more interested in how bonds and gold react to the FOMC announcement than stocks. The stock market remains on solid footing and the bull market should continue into 2015. Bonds and gold are in a different position, especially in the short-term…

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2014 Fearless Forecast

It’s really embarrassing that it’s been almost two months since I began speaking about my thoughts for 2014, yet I have been unable to mass distribute them. Shame on me! So far, to those folks who have read them, the comments and questions have been great. Keep them coming!

Regular readers of Street$marts and this blog won’t be surprised at most of the forecast, but I did throw in a few new items. As always, I had a lot of fun thinking about it and creating it, although it has no bearing on how we manage money for our clients.

U.S. Stock Market – After an epic 2013 for the stock market, what can we expect for an encore? To begin with, it’s a mid-term election year and the second year of the president’s term. Historically, that hasn’t been so kind to investors with some of the largest declines in history as well as the end of some bear markets. More recently, however, 2010 and 2006 were kind in the end, but volatile during the year.

Looking at the big picture, there are no signs yet that the old and wrinkly bull market is ending anytime soon and my analysis still has upside projections to at least 17,000. We typically see a number of warning signs with various leads times, but only one of those are in place today and that may be corrected. Those warnings signs may set up later, but at this time, stocks remain the place to be on any dips. With that said, a routine, normal and healthy 5-10% bull market pullback should be seen during the first quarter that leads to more all-time highs later in the year.

On the index front, although the major US indices are highly correlated to each other, it’s time for the Russell 2000 index of small caps to cede leadership to its large and mega cap cousins.

U.S. Stock Market Sectors – Technology is usually the group of choice each January and I continue to rank it as a market performer at best. I wouldn’t run out and load up on this sector unless we saw a sizable market correction. As the economy and markets are late in the cycle, sectors like REITs and energy should provide solid relative performance, especially later in the year. Even perennially hated utilities should grab a bid.  With my long-term positive stance on the dollar, it makes liking commodities more difficult but I do believe 2014 will reward buying the dip and selling the rip in this area.

On the wild side, biotech, pharma and healthcare should go parabolic during the first half of the year with the social media group also a possible candidate. Investors should keep in mind that parabolic rallies like the Dotcoms never, ever end by going sideways to rest.  They end in disaster and ruin like we saw with crude oil in 2008.

It’s rare for me to really hammer on sectors in the annual forecast, but after five years of strong outperformance, I am very negative on consumer discretionary and retail. I think 2014 will be the beginning of the end for this trade and similar to my stance on the small caps in general, I would pair this with a long in large or mega caps.

All in all, 2014 looks to be more of a digestive year, like 2011, 2004 and 1992 than a full fledged bull or bear year.

Volatility – There are many ways to discuss volatility, but the one that resonates well with me is that of a sine wave. It moves fully from one side all the way to the other, like a pendulum. While the market may not operate so neatly, low periods of vol are usually followed by higher periods of vol and vice versa Put another way; volatility compression leads to volatility expansion and volatility expansion leads to volatility compression.

2012 was largely a non volatile year, but 2013 was downright boring from a volatility standpoint. That can be traced to the Fed’s QE Unlimited, which will be going away. So 2014 looks to be a whole lot more volatile than 2013 and probably 2012. If so, that will likely lead to 2015 being even more so as volatility normalizes.

In short, the investment play is to buy vol anytime it heads back to the low end of the range and sell it into spikes, which there should be many.

Long-Term Treasuries -I am so beyond sick and tired of hearing the pundits proclaim that “bonds are in a bubble”. Statements like those absolutely wreak of ignorance. Bubbles are all about greed, clamoring and fear of missing the boat. They are formed in many stages with the final one being a total rush into the asset, primarily by the public. During the modern investing era, new products are launched to give greater access to Main Street. Your neighbors all own the asset and it’s all over the media. There is nothing about bubbles that has pertained to the bond market and there never will be.

The secular bull market in bonds may have officially ended in mid 2012,  but that doesn’t mean and shouldn’t mean that interest rates are heading higher in spike fashion. Clearly, over the coming years and decades, rates will normalize and head back to mid single digits unless the Fed makes a huge blunder like the Arthur Burns led Fed did in the 1970s.

I envision rates heading higher like we saw in the 1950s and 60s, slowly and gradually. Two steps up and one step back. We have already seen the 10 year note yield double as the first stage of the bear market began. I do not believe we will see anything close to a doubling anytime soon. Rather, as I first wrote about and publicized last November, bond market sentiment had become so negative that a rally in bond (decline in yields) wasn’t too far off.

For 2014, the bond market should offer a solid risk/return profile, at least for the first half of the year as inflation remains nearly non-existent, our economy slows and Europe deals with deflation, all against the backdrop of the Fed reducing its purchase of treasuries, for now. While the 3.50% to 4% area on the 10 year looks like a good intermediate-term target, it should not get there right away and investors should not become perma bears on bonds.

Corporate bonds – This group has seen a much stronger rally from their 2013 lows than their treasury cousins, but still behaves well and should see strength during the first half of 2014. Further down the risk spectrum, high yield bonds will continue their 2013 position of lagging and underperforming as the slightest ripple in the liquidity stream could upset this apple cart quickly.

Dollar – I am posting the exact comments as I did last year. Since THE bottom in 2008, the dollar has been in a trading range which I have stated is the beginning of a new, long-term secular bull market. Anyone who has bought strength or sold weakness has been punished and that’s likely to continue for a while before the greenback finally breaks out above 90 on its way to target number one at 100 over the coming years.

I remain very bullish on the buck long-term and believe it can be bought into weakness for a long time, especially given the Fed’s exit from QE, the ramping up of QE in Japan and the anticipated QE in Europe.

Gold – The yellow metal’s secular bull market is not over and it will take another year or so to reinvigorate it. Gold saw twin price lows in the $1180 area that should lead to test targets of $1360, potentially $1440 with a chance of seeing north of $1500 before ultimately turning lower again. When the ECB hops on board the QE bandwagon, look for gold to break out above $2000 later this decade on its way to $2500 and higher.

Commodities – I continue to favor the agricultural and tropical commodities like wheat, corn, beans, sugar, coffee and cotton over the rest with corn being among the candidates for trade of the year. They have been under pressure for a while and weakness should be viewed favorably.

Inflation – I still feel like a broken record year after year after year after year, but I don’t have many concerns about inflation, at least not until we get to the other side of the next recession. The Fed is trying to engineer some healthy inflation, very unsuccessfully I might add. $5 TRILLION in QE didn’t produce any. Money velocity continues its downward spiral. Housing prices are stable. Wage growth is essentially zero and the banks are holding trillions of dollars on reserve with the Fed. This economy still has rolling whiffs of deflation, but nothing compared to the outright deflation in Europe and Japan.

Economy – As we start another new post financial crisis year, no one should be shocked to learn that the masses are positive on our economy yet again with projected GDP growth rates in the mid 3s. I think I have said it every year since the recovery began, but I will repeat it again. We are living through the typical post financial crisis recovery that teases and tantalizes on the upside and worries and frets on the downside. As with other post financial crisis recoveries around the globe, our economy will not return to an historical sense of normalcy until we get to the other side of the next recession.

Federal Reserve – It’s a whole new ball game for the Fed in 2014; or is it as Janet Yellen takes over for one of my financial heroes, Ben S. Bernanke. I believe history will judge Bernanke as the single greatest Fed chair of all-time who should have been given hazard for having to sit and endure so many hours in front of the incompetents in Congress.

With all of the permanent voting members but Jeremy Stein in the dove camp, Richard Fisher and Charles Plosser will have their hawkish hands full this year dissenting on any vote that doesn’t involve continued tapering. Keep in mind that Fisher, Plosser and Jeff Lacker were the three amigos who fought cutting rates and turning on the fire hoses during the summer of 2007 when the sub prime crisis was unfolding.

The Fed’s multi-year money printing program or QE will sadly come to an end in 2014 reaching my longstanding target of $5 trillion. I vividly remember throwing out that number almost four years ago on CNBC’s Squawk Box and was almost laughed off the show. That one comment generated more emails than any other forecast I have made on TV.

As I have said for more than a year, I absolutely do not believe the Fed should even consider tapering until we get to the other side of the next recession, even though QE is having diminished results. It’s the wrong thing to do at the wrong time. It was wrong in 1937 and that caused the Great Depression Part II. It was wrong in Japan more times than I can count over the past 25 years. The Fed should not stop QE.

Obviously, I am also 100% against even considering raising short-term interest rates at all in 2014 and likely much longer into the future. I am sure the three amigos of Plosser, Fisher and Lacker are foaming at the mouth in anticipation of higher rates, but if history has shown us anything about these bankers, they are usually dead wrong.

Unemployment – If you told me that the unemployment rate would fall towards 6.5% in 2013, I would have fallen on the floor and passed out from shock. The economy would have to have grown at 4% or more. Had I any inclination that the labor participation rate would fall to levels not seen since the mid 70s, I would have questioned the accuracy of the government’s numbers. Both occurred last year and those trends should continue in 2014 creating a conundrum for the Fed and economists. The raw unemployment number is strong, but certainly not for the right reasons.

Japanese Yen – And I thought Bernanke’s QE was the greatest financial experiment of all-time. Silly me! That title now belongs to the Bank of Japan. Not only is the yen in a confirmed bear market after a 15 year secular bull market, but the Bank of Japan remains committed to an historic money printing program that will dwarf that of the Bernanke Fed.

It’s Abe, Abe and more Abe. The yen has much, much farther to fall and all rallies can be sold until further notice. The BoJ has learned from their mistakes of the past when they prematurely ended QE. Look for them to go overboard in hopes of ending what has essentially mounted to 25 years of economic malaise and rolling bouts of deflation.

As the world saw in the previous “greatest financial experiment of all-time” with leverage, mortgages, artificially low rates, the alphabet soup of exotic financial products that no one understood and on and on, they rarely end well. Long-term, I have serious doubts, but for now…

Japan – If the Bank of Japan is going to print baby print, it’s very difficult not to be positive on the Nikkei for 2014. If their economy doesn’t respond quick enough or if their markets fall too fast, the BoJ will just crank it up a notch until it works. I remember arguing on TV that investors should never fight with the guy who owns the printing press and that certainly holds true in Japan. The Nikkei should be a leading developed market index in 2014.

Europe – Euro zone problems are far from over, but have taken a breather over the past year. ECB chief Mario Draghi’s jawboning to save the Euro currency has certainly worked in the short-term with sovereign bond yields declining precipitously in the PIIGS countries. At the same time, however, austerity is causing all sorts of economic issues with deflation being chief among them. If that genie gets out of the bottle in meaningful way, look out below!

Additionally, all is not well beneath the surface as a major, major crisis looms in France possibly late in 2014, 2015 or even into early 2016. Germany was certainly not happy about the bailouts in Greece and Cyprus or the ECB programs designed to save Spain and Italy.  The big test comes when the Germans have to figure out how to save a country that is too big to fail and too big to save. I smell a constitutional battle brewing to allow the ECB to outright print money.

Emerging Markets – Coming off an horrific 2013, emerging markets begin the new year on their heels with continued unrest, currency dilemmas and slowing growth. I will go out on a limb and forecast that the sector sees a significant low in the first half of 2014 and outright leadership and strength during the second half of the year led by the secondary countries. The macro trade would be owning a broad emerging markets ETF against a short in the US small caps.

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