I am the Federal Reserve, hear me
roar.
Printing dollars in numbers too big
to ignore.
With an apology to Helen Reddy for paraphrasing her early
1970’s anthem, the Federal Reserve dropped a bombshell on the markets last week,
and the reverberation may endure for years to come.
In an eagerly awaited announcement, the Fed launched another
round of money printing and said it would start purchasing an additional $40 billion
per month in agency mortgage-backed securities. This, on top of an existing
debt buying program, will add about $85 billion per month to the Fed’s balance
sheet through the end of this year. While that part of the announcement was not
too surprising, the twist that turned investors’ heads was the following two excerpts
from the Fed’s statement.
1)
If the outlook for the labor market
does not improve substantially, the Committee will continue its purchases of
agency mortgage-backed securities, undertake additional asset purchases, and
employ its other policy tools as appropriate until such improvement is achieved
in a context of price stability.
2)
The Committee expects that a highly
accommodative stance of monetary policy will remain appropriate for a
considerable time after the economic recovery strengthens.
Source: Federal Reserve
The Fed did two new and astonishing things in these excerpts.
First, they made this intervention “open-ended” whereas in the past, they put a
fixed dollar amount and time frame on it. Second, they said the intervention
would continue long past the time when the economic recovery strengthens, which
suggests the Fed may keep pumping the economy full of gas even if the tank is
already full.
With this aggressive action, two words come to
mind—unintended consequences. Already, we’ve seen commodity prices, precious
metals, and long-term interest rates rise and the U.S. dollar slump. To take a
quote from Aldous Huxley and, before him, William Shakespeare, we’re in a brave new world with these moves, and as
your advisor, we’re doing our best to succeed in it.
“SITUATIONAL AWARENESS”
IS A MILITARY CONCEPT that has some applicability to our
role as a financial advisor. In the military sense, it’s defined as:
Knowledge and understanding of the current situation which
promotes timely, relevant, and accurate assessment of friendly, enemy, and
other operations within the battle space in order to facilitate decision making.
An informational perspective and skill that fosters an ability to determine
quickly the context and relevance of events that are unfolding.
Metaphorically, you could consider Wall Street the “battle
space” replete with friends, enemies and all kinds of noise and news that may
or may not affect the battleground. Making sense of all this cuts to the heart
of situational analysis.
Not surprisingly, there’s a process to situational analysis.
Air Force Colonel John Boyd developed the OODA Loop in the 1950s, which stands
for Observe, Orient, Decide, Act. Through this iterative process, military
folks observe a situation, process what it means through orientation, decide on
a course of action, and then act to solve the problem. Similarly, financial
advisors use a process to analyze incoming information and then take action.
In theory, this sounds like a reasonable way to make
decisions in a complicated world. And, for many years, it worked for the military
and advisors alike. But guess what? Times change. As the military realized, the
world is evolving from being merely complicated to the more nebulous complex;
one characterized by more ambiguity and hyperspeed in information.
In today’s complex financial world, the OODA Loop process has
lost some effectiveness. To evolve with the times, we have to become better
critical thinkers. We have to challenge more assumptions and offer alternative
scenarios. We have to think about unintended consequences and potential “Black
Swan” events. We have to get comfortable in making decisions in a world of
uncertainty and ambiguity.
Will we always get it right? No. But we can assure you we
are continuous learners and strive hard to make effective decisions on your
behalf.
Weekly Focus – Think About It…
“Complexity is the
prodigy of the world. Simplicity is the sensation of the universe. Behind
complexity, there is always simplicity to be revealed. Inside simplicity, there
is always complexity to be discovered.”
--Gang Yu, PhD,
Associate Professor, UT Southwestern Medical Center
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