I get so much broker research that I must admit I don’t usually read it or do so really fast. But the headline above caught my eye, and the piece turned out to be such a fun read, as well as truly thought-provoking and insightful, that I’ve made it today’s Outside the Box. The personalization of a “relationship” with the Fed gives us a decidedly delicious way to think about QE!

Michael Cembalest walks us through the changes in his attitude toward the Fed, from the heady days of early 2009, when

The Fed Chairman’s picture in the paper reminded me of a cross between Sean Connery and King Hussein of Jordan. His message was clear: he was going to shroud the markets in a warm embrace of unbounded, limitless liquidity. It was slow at first, but then appeared everywhere I looked, like an endless, pounding summer rain.

By late summer, though, his impressions shifted:

… as the leaves turned, these opportunities began to fade as capital came back to credit markets. I held on tight, pulled in a convulsion of rising optimism and the search for yield.

But that’s ancient history now, he says:

For the last fifty months, the Fed has been buying Treasuries and Agencies, $2.5 trillion in all … My relationship with the Fed started to change: with its relentless debt purchases and 0% policy rates, the Fed apparently sees me as a rentier capitalist whose savings should be expropriated by keeping short term interest rates below inflation. What’s a rentier capitalist? According to Lenin, someone who ‘clips coupons, who takes no part in any enterprise whatever, whose profession is idleness’. I began to question my feelings about Quantitative Easing, even though it led to a very powerful rally in the credit markets…

He goes on to take a thoughtful look at the pros and cons of QE, with some of the best analysis I’ve seen, concluding with these deathless lines:

A period of diminishing credit returns is upon us, and it’s probably time for those with more than a normal credit allocation to begin saying goodbye. It will not be easy; love knows not its own depth until the hour of separation.

Once credit markets began to tighten, he notes, “investors rushed headstrong into an intense love affair with dividend-paying stocks.” That has certainly been a strong theme here at Mauldin Economics, in both our Yield Shark and Bull’s Eye Investor letters.

I’ll just tease you with the opening lines of his final sections:

What of equity market valuations overall? Has a dreaded Fed-driven overvaluation cycle already begun?...

Reasonable valuations and a modest recovery in the US, China and parts of the developing world should keep the party going….

Nevertheless, the end of the affair will come one day, and probably when I am not expecting it….

I remember the last time I was in this kind of tangled, complicated relationship….

Good stuff and well-written! I will pay more attention to Michael Cembalest in the future, to see if he can keep this up.

This has been a whirlwind week. I finished up in Palm Springs, flew back on Monday, and wrote this week’s TFTF that night. The next day saw multiple afternoon meetings and dinner with Dick Pfister, one of my long-term partners from Altegris. The next morning Jon Sundt, president and founder of Altegris, joined us and we drove out to spend the day with Kyle Bass at his Barefoot Ranch in Athens, Texas, where between meetings and calls we did take a little time for some fun. My son seems to have a knack for skeet shooting, while keeping myself seated on a very gentle horse was more my speed. I needed to see if I could still ride without getting back issues, because I’m supposed to do some trail riding in the Argentinean Andes in a  few weeks. I think I am good to go.  And we did finalize some plans for helping you navigate the current rather uncertain market landscape. I will let you know as they develop.

Back at home, we are busy making plans to move and put everything into storage while we wait for the new condos to close. I leave for Cafayate, Argentina, next Thursday and will move into a hotel when I return in two weeks, until the new place is finalized. I’ll move in and then move right back out again when construction starts. So, homeless off and on for the next few months, but the end result will be something of a dream come true for me.

The haunting sounds of Ladysmith Black Mombazo’s poignant song “Homeless” keep running through my mind. If you are not familiar with their work, you should be.

Your moonlight sleeping on a midnight lake analyst,

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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Fifty Trades of Grey

An illustrated story of investment, temptation, addiction, and the cost of money

By Michael Cembalest, J.P. Morgan Asset Management

Q1 US retail sales were better than expected in January, despite higher tax rates, as the US consumer is still more active than European counterparts (1st chart). It’s too soon to see the full impact of higher US income and payroll tax rates, but a Q4 jump in…