Disastrous Fed Policy
September 25, 2012
The Fed’s quantitative easing policy will be “disastrous,” according to Jim Bianco, but prices for riskier assets will rise over the near term as a result. In remarks last week, Bianco, the head of the Chicago-based economic research firm that bears his name, also gave the US economy a near-failing grade of C-, and warned that inflation will be “problematic.”
Assessing Fed policy and its effects on the economy and the markets was the subject of a talk Bianco gave last Wednesday at a lunch sponsored by the Boston Security Analyst Society.
“Fed policy will produce the worst possible outcome,” he said. “It will make rich people richer, because rich people own stocks, and they will go up. And it will make a poor people poorer, because it is not going to create jobs and they are going to pay higher gasoline prices.”
Let’s review Bianco’s forecast for the economy and inflation and how he believes the Fed’s policies will affect markets.
A weak economy
Bianco called himself an “old-school” economist who believes in leading, coincident and lagging indicators. He cited several such indicators to justify his weak forecast for the US economy.
The economy is not in or heading toward a recession, he said, despite warnings from the Economic Cycle Research Institute (ECRI). But he said that firm’s leading indicator – as well as the Chicago Fed National Activity index – both forecast GDP growth of approximately 2.5%. Bloomberg is estimating 1.8% GDP growth in the third quarter and only 2% for the fourth quarter.
Bianco said economists have been consistently downgrading their Q3 and Q4 GDP forecasts, as well as forecasts for sub-components such as industrial production and payroll.
Operating earnings for the S&P 500 were down approximately 1% in Q2, he said, and Q3 is expected to be negative as well. Forecasts for Q4 are falling rapidly, Bianco said, although some analysts are forecasting a rebound.
On the revenue side, there was 1% growth in Q2 and forecasts call for negative growth in Q3, he said. That would be ominous, according to Bianco, because every time quarterly S&P 500 revenues have shrunk, a recession has followed shortly thereafter. That follows naturally, since approximately $11 trillion of our $16 trillion economy comes from the sales of S&P 500 companies. Without growth in that component, it’s unlikely the overall economy will grow, Bianco said.
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