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New York, September 18, 2012, Advisor Update®
Behavioral finance professionals might describe Thursday’s US Fed “QE3” announcement as “answering an easier question” or a heuristic known as “Substitution.” In this instance, the technical definition of heuristic is a procedure that finds politically adequate, though incomplete answers to difficult questions. The human decision making function is most often powered by emotions and impulses, not precise analytical thinking.
Short term—since that is the time period on which the Fed has decided to focus—we can expect the equity and commodity markets to react favorably to more Fed stimulus and a cheaper trade weighted dollar. Longer term, there are some fairly painful outcomes. QE3 has the potential to contribute to commodity inflation, a crisis of confidence in the US$ and distorted capital markets. Ultimately, it should have very little long term impact on the Real Question in bold above.
But make no mistake, QE3 is a game changer in the sense that the US central bank has dropped any pretense of inflation targeting for the foreseeable future. This is positive for equities, corporate bonds (US corporations and emerging markets) and high yielding securities of all types.
We’ve been talking about the Real Question ever since the Obama administration took the National Commission on Fiscal Responsibility and Reform Commission Report of December 201o (known as Simpson-Bowles) and tossed it in the political waste can. Republicans get no free pass either since they have steadfastly ignored the tax reform (lower rates, fewer deductions) aspects of Simpson-Bowles. And we are clearly running out of time, which is why we believe the Fed acted with such force (those of you who have actually read the Report will remember it is subtitled “The Moment of Truth”). What are the options left on the Government monetary and fiscal policy roulette wheel?
I find it sadly ironic that the word heuristic is derived from the same root as eureka. Clearly that does not describe the state of economic policy in the US.
Please email us your comments, questions, etc.
John Forlines III and James Gardiner