The Fed Is Virtually Guaranteeing Stocks Will Go Up
Now’s a great time to buy US stocks.
I know it sounds crazy… I see the same headlines as you do. And they scare the hell out of me.
Look, I get it. It’s tough to invest your hard earned money when you see European countries are up to their eyeballs in debt, with no good way to pay it all back. Economic growth in China has slowed to its weakest level in two years. And the housing and job markets in the US are still a wreck.
But none of it matters, at least not this year, because there’s something even more powerful than all of the bad news.
Simply put, it’s presidential election year economics.
As I’m sure you’re aware, President Obama’s hopes for reelection are hanging by a thread. They hinge on how the economy and stock market perform between now and Election Day.
It’s obviously in President Obama’s best interest to get the US economy growing faster and adding jobs.
Well, it just so happens the Federal Reserve has a lot of power to control the US economy. The Fed sets short term lending rates and they use monetary policy to press on the economic accelerator or tap the brakes as they see fit.
And the one thing that’s really juiced up the stock market and economy over the last few years has been quantitative easing (QE). QE is where the Fed buys Treasuries to pump more money into the financial system.
A well timed round of QE could be just the thing to pump up the economy and get President Obama reelected.
Here’s where it gets interesting…
The Fed is composed of seven voting members including Chairman Ben Bernanke. The Fed Board meets periodically to set interest rates and decide if their policies need to be changed.
However, two positions are currently vacant and another one occupied by Elizabeth Duke will end this month. That means there are three Federal Reserve board member posts up for grabs.
Take a wild guess who gets to appoint people to the Fed… That’s right, it’s President Obama.
Get this, the two board members who already left and Ms. Duke are all inflation hawks. They prefer to keep a lid on inflation. And they’re less likely to favor monetary policy like quantitative easing.
Clearly, the Federal Reserve Board is losing three members who would vote against more QE. And now President Obama gets to make three appointments to the Board.
He’s obviously going to favor people who share his view that the Fed should continue to use QE to juice up the economy. Even if he appoints one inflation hawk who doesn’t favor more QE, he’ll still gets to add one or two that do.
In fact, just last week he nominated two people for the empty Fed seats. One of them is a Democrat and the other is a Republican. This crafty piece of political maneuvering will assure the Senate will confirm them both.
But here’s the thing, Obama still wins.
The math is pretty simple… The Fed is losing three members likely to vote against more QE and it’s gaining one or two who will likely favor more QE.
It looks like the conditions are ripe for another round of stock market juicing QE. And that’s great news for stocks across the board.
It’s times like these that you’ve got to ignore the negative headlines and look at what will really drive the market. And right now the likelihood of another round of QE is virtually guaranteed. And that means stocks will be higher by the time the Presidential election rolls around in November.
Category: Bonds
