Thursday, May 2, 2013

Thematic Thursdays: The Fed's "Highly Experimental Policies"

"The benefits of what they are doing comes with costs and risks," El-Erian adds. These are "highly experimental policies. We are not sure what the side effects are [and] there is already collateral damage."

So states the CEO and co- CIO of PIMCO in a recent CNBC interview referring to the actions taken by central banks around the world - actions taken that are clearly designed to mitigate the consequences of fiscal tightening in these debt-obsessed times. What one might need to know is whether these "highly experimental policies" with their "side effects" and "collateral damage" is understood and appreciated by those whose task it is to understand and appreciate such striking words?

Now, your garden variety professional investor, particularly the bottom-up type, has no capacity to incorporate such dynamics into his/her financial and valuation models for the job at hand is to obsess on revenues, earnings, profit margins, products, etc. etc. of the companies he/she is charged to analyze, while leaving the macro stuff to the firm's economist. But can it be said with any degree of confidence and certainty that the firm's economist is capable of envisioning the consequences of such "highly experimental policies"? Is there some period in times past when such conditions of a similar nature existed which can serve as a guiding light to the outcome? As far as I can tell, the answer to that question is a resounding NO.

Speaking of questions, consider the following one - replete with a nightmare scenario.

As someone who interacts with economists on a fairly regular basis at numerous events and in media settings (many of which I am the moderator or interviewer), I still have yet to get an answer - other than "I don't know" - to my question: "What happens if the economy turns down when interest rates are zero bound and there is zero appetite for new debt?" Are we not then in danger of a economic pro-cyclical death spiral? Or will government leaders respond in sufficiently rapid manner to swallow their dogma and marshall the power at their disposal? Well, if you think the latter then you haven't been studying the crisis in Europe and the morality play imposed by Germany and its northern neighbors on those lazy southerners. Nor have you been paying enough attention to the governance fiasco known as the US Congress and the delegator-in-chief who sits in the White House.

Investment Strategy Implications

So, stocks chug along as record-breaking earnings and record-breaking profit margins join forces with zero bound interest rates to produce a risk-on state of affairs courtesy attractive valuation models - those pesky consequences of "highly experimental policies" with their "side effects" and "collateral damage" be damned. Aaaah, ignorance is truly bliss.


Thematic Thursdays is a product of Blue Marble Research Advisory and focuses on important global trends and themes impacting the global economy and markets.

On average, thematic issues are longer term in nature, transcending the business cycle in time and economic sector categorizations. However, many shorter term players in the financial markets use trends and themes as a staple of their investment strategy. Understanding how to incorporate thematic analysis - along with fundamental and technical analyses - is an integral part of the process that forms the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

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