The Edmond Sun

January 10, 2014

2013: The year that Quantitative Easing bought

Nick Massey
Special to The Sun

EDMOND — In “The General Theory of Employment, Interest and Money” John Maynard Keynes referred to what he called the “euthanasia of the rentier.” A rentier is a person or entity that receives income derived from economic rents, i.e. income from patents, copyrights, real estate, interest or profits.  

Keynes argued that interest rates should be lowered to the point where it secures full employment (through an increase in investments). At the same time he recognized that such a policy probably would destroy the livelihoods of those who lived off their investment income, hence the expression. Published in 1936, little did he know that his book referred to the implications of a policy which, three quarters of a century later, would be on everybody’s lips. Welcome to QE, Quantitative Easing, the Frankenstein monster created by our Federal Reserve and many central banks across the world.

It’s that time of year again when I review my predictions for last year and stick my neck out again for 2014. Napoleon Bonaparte once said, “Never interrupt your enemy when he is making a mistake.” In looking at my result for 2013, someone should have interrupted me. It was a tough year, at least for my predictions.

The problem — the thing I have despised so much — was QE. I have written several times in the past couple of years why I thought the Federal Reserves’ QE program was a mistake. It’s not that the Fed’s ongoing money printing and purchase of up to $85 billion a month worth of Treasury bonds and mortgage backed securities doesn’t work. Oh it works all right. For now. The problem, in my opinion, is that it didn’t solve anything, created other problems and only postponed dealing with many others.

I never believed that the Fed and every major central bank in the world would take QE this far and this long. So much for that thought.

In the meantime, all that money had to go somewhere and it was quite clear that the stock market was a primary destination. With interest rates near zero, investors had no choice but to accept safety and no return on investments, or step out of their comfort zone into riskier assets. As it turned out, the stock market was a nice place to be. All major indices hit record highs by the end of the year. The Dow closed at 16,576 — up 26.5 percent. The S&P 500 hit 1,848 — up 29 percent. If you were heavily invested in equities, you were probably quite happy. If you invested in money market, CD’s or bonds, probably not so much.

So with that as background, how did I do last year? In a word — lousy. The danger in making public forecasts is you occasionally get a little egg on your face. Last year I got the whole omelet. Here’s what I said and what happened:

1. Stocks will finish higher in 2013, but there will be hard work along the way as a classic “sell in May and go away” pattern happens for the fifth year in a row….. up 10 percent for the year. Result: At least I was right on the direction, but we never got the correction and finished up 29 percent.

2. The next leg of the European sovereign debt crisis comes back in the summer triggering the summer downturn. A nasty, public slugfest in Congress over the debt ceiling will further give stock owners ulcers.  Result:  While the problems in Europe are still brewing, nothing much has happened for now and Europe pretty much stayed out of the headlines. The stock market mostly ignored the debacle in Congress and didn’t seem to care.

3. The Fed will use any substantial weakness in the market to launch another quantitative easing program. Result: We didn’t get the market drop but the Fed continued QE anyway.

4. The Treasury bond market has finally peaked but is not ready to pop the bubble yet. Yields will just move to a higher trading range. The range for the 10-year Treasury bond yield was 1.40 percent to 1.90 percent in 2012. We probably move in a new range of 1.90 percent to 2.50 percent. Result:  Partially correct. The 10-year moved up to a 2.40 to 2.95 range.

5. The U.S. government runs another $1 trillion deficit for the sixth year in a row. Result: A $680 billion deficit, the lowest since 2008, mostly due to higher tax receipts and lower government spending — the one positive effect of sequestration.

6. Gold is not dead; it is just resting. Result: Gold is not dead but appears to be in a coma, closing the year at $1,204 — down 28 percent for the year.

7. For the economy, the second lost decade continues. I am sticking with a 2 percent GDP growth forecast for 2013. Result: GDP figures picked up in the second and third quarters to 3.6 percent, but it still looks like less than 3 percent when the fourth quarter figures come in.

8. Forget about employment. I believe that the U.S. has entered a period of long-term structural unemployment. Yes, we may grind down to 7 percent, but no lower than that. Result: Latest unemployment figure was 7.0 percent.

So there you have it. It was a tough year for forecasting and the only negative year I’ve had since starting the annual predictions six years ago. I’ll try to do better this year. This is one more reason why, no matter what we think will or will not happen, we stick with our investment discipline and don’t try to make market bets. You shouldn’t either.

In two weeks I’ll stick my neck out once again with my predictions for 2014. Maybe I should just heed the words of Mark Twain when he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true.” Maybe I should, but I just can’t help myself.  Thanks for reading.



NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through LPL Financial, member FINRA/SIPC.