Back on September 14, the Federal Reserve Chairman Ben Bernanke shocked and “awe-struck” the investing world. The U.S. Fed did not merely embark on another bond-buying binge like they had in previous versions of quantitative easing (i.e., QE1, QE2). Whereas the earlier iterations had specific dates, “QE3″ is open-ended.
Bernanke has made it clear that the Fed will continue to create dollars electronically and then purchase mortgage-backed bonds for as long as it takes to accomplish their objective. (What’s the objective again? Full employment? Price stability a la “acceptable” inflation?)
Over the course of the last 4 years, the Fed has essentially kept interest rates at negligible levels. The Fed has also bought treasuries and mortgage-backed bonds, as well as rolled short-dated maturities into longer-dated maturities. And they’ve done so with dollars they created out of thin air.
The actions have resulted in consistently declining mortgage rates, higher stock and commodity prices as well as recent home price stabilization.Â Those haven’t been bad things for investors. Not in the short-term, anyway.
Still, is the “wealth effect” actually creating jobs?
If you listen to Bernanke speak, he believes the Fed has succeeded in stimulating job growth through an increase in real estate-related activity.Â However, the evidence that lower interest rates are actually enhancing the job picture is suspect at best.
Consider the “stats” from initial Federal Reserve QE policy (circa 11/08) through the end of September (09/12). The most reliable statistic for employment is the labor force participation rate, which tells us the percentage of working-age adults who are employed. That number sits near a 30-year low at 63.6%… Â which is certainly not better than when the Fed first began its QE policies several years ago.
Didn’t the Bureau of Labor Statistics (BLS) just report that the U.S. created 114,000 new jobs in September and that the unemployment rate fell from 8.1% to 7.8%? Doesn’t that suggest that the Fed’s monetary policies are beginning to have a positive impact?
While the headline unemployment rate may help the White House politically, the number would be 9.8% when one factors in the number of working-aged people who have stopped participating; they’re neither looking for employment nor receiving unemployment compensation. And when one follows other labor statistic measures like U-6 — measures that chronicle the underemployed — the number is 14.7%.
Summed up in another way, most measures of employment have gotten worse since QE first began in November of 2008. Even the headline number of 7.8% is at the same place as when President Obama started office in 1/09. Most notably, the simple fact that Federal Reserve decided to enact an open-ended QE policy this past September tells everyone that the employment situation is bleak. The only question is whether or not the Fed is helping or hurting with its monetary policy.
Actually, there are additional questions for investors. What types of assets should you acquire in a currency-devaluing environment characterized by commodity price inflation and marginal economic growth?
First, I think it is important to minimize risk with inflation-fighters. Vanguard REIT (VNQ) as well as iShares Gold (GLD) often do well, even when consumer prices are tame.
Second, those who can tolerate volatility better would do well to look at Real Asset ETFs. Consider Guggenheim Timber (CUT) and/or First Trust Natural Gas (FCG).
Third, I’m a big believer that the world’s second largest economy, China, has far more policy wiggle room than the European Union or the United States. This is not to suggest that the best way to profit from monetary and fiscal stimulus on the mainland would come from exclusively investing there. However, it does explain whyÂ Asian Pacific ETFs are relative strength standouts. Take a look at iShares MSCI Asia excl Japan (AAXJ) or iShares MSCI Malaysia (EWM).