A tear gas economy | Ben Esget

By Ben Esget
Contributing writer 

Near the end of 2008, the Federal Reserve embarked on a brand new method of monetary stimulus called quantitative easing, which came on the
heels of a massive stimulus and unprecedented low interest rates. The Fed’s actions were quickly replicated by central banks all over the world.

Since 2008, the Federal Reserve has embarked on QE2, QE3, Operation Twist, and what is now being referred to as ZIRP.

Simultaneously, China, Europe, Japan and even South America have continued low interest rate policies, quantitative easing, and stimulus programs.

The Fed’s goal in the aforementioned programs was not just to stimulate the economy but also to stimulate risk taking. The process of deleveraging coupled with fear of a new depression pushed those with capital to the bunker of low risk and guaranteed returns.

Concerned about deflation and unable to force capital back into risky assets, the Fed decided it would gas people out of this refuge by making it too uncomfortable for them to stay in hiding. Seeing the power of tear gas, central banks worldwide collectively embraced this technique.

And it worked!

Savers and investors alike rushed to risk assets once again. Real estate was scooped up, yields were chased (and in the process, ultimately pulled down), stocks rallied, commodities rallied and people felt wealthy once again.

But can this wealth be trusted?

Let us not forget that the purpose of tear gas is to move people from a position they are unlikely to move from of their own accord and force them into taking a different position. Does being uncomfortable warrant an investment you would no make otherwise?

This is a profound question if you think about it.

Can demand for financial instruments be engineered over the long run, or do all investments have an inherent risk/reward paradigm that ultimately gets priced in regardless of central bank manipulation?

I get very nervous watching the jubilation surrounding the rally since 2009. Not only is it one of the weakest rallies in American history, it is fueled by the most aggressive monetary policies ever attempted on planet earth.

If you believe that assets do have inherent risk/reward characteristics, it means there is a lot of hot money propping up investments all along the capital structure. It means the rally is artificial.

Perhaps, like many things in life, the truth is somewhere in the middle.

Assets may have inherent risk/reward characteristics as well as relative characteristics. In this case, investors must consider how much monetary policy is impacting valuation and look for reasonable rates of return where central banking has not overly impacted an asset’s valuations.

Investors should also carefully monitor economic growth around the world as a gauge of central banking effectiveness until the tear gas ceases.

Ben Esget is the president of WealthMark LLC, an investment firm in Bellingham. His columns appear on BBJToday.com every other Wednesday. Esget also runs the finance blog Outsider-Trading.com, in an effort to level the playing field between Wall Street and Main Street. Contact him at 360-734-1323 or ben@wealthmarkllc.com.

Author’s note: The information in this column should not be construed as investment advice. Everyone’s goals and investment portfolios are unique. Please contact a financial adviser or an accountant for your particular needs.

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