The month of September has been quite impressive in spite of what the historical records were suggesting could happen. Everyone is clearly anxious to hear what the Federal Reserve will say at its two-day Federal Open Market Committee (FOMC) meeting ending on Wednesday and whether Ben Bernanke will begin to taper the Federal Reserve’s bond buying.
My feeling is that no matter if it’s Wednesday or October or even December, the Federal Reserve will soon start to ease back on the throttle and begin the process of reducing the easy money that’s being pumped into the U.S. economy. Why the Federal Reserve meeting has turned out to be such an event is surprising.
Whether or not the taper is announced this week, you should get yourself stationed for higher bond yields down the road, as they are likely to move above the three-percent threshold from their current 2.92%.
I mean, who cares if the yield surges to over three percent? It’s going to eventually happen anyway. And unless you are happy with a yield of just over three percent, I really don’t think you will be rushing out to buy bonds. Lots of institutions and the rich will likely begin to shift capital away from equities and into bonds, but for many individual investors, it will be business as usual.
It may just become a bit harder to make money without the continued money printing from the Federal Reserve, but it’s not exactly an insurmountable hurdle. Yes, not all stocks will go up. You will need to be more selective in your stock picking. That means careful analysis; the Federal Reserve is no longer available to hand you money.
So as bond yields begin to edge higher, so will the flow out of equities. But what I envision is that opportunities will be generated, especially if the stock market sells off when the tapering occurs.
Look, folks, we are not headed for a stock market Armageddon.
The real problem I see will come a year or two down the road as interest rates begin to ratchet higher. With the massive debt levels accumulated by the government and its citizens, the carrying costs of debt will surge, which will place a lot of pressure on debt-laden parties. Of course, you can thank the Federal Reserve for this.
We could even see another financial crisis materialize, as those carrying massive debt loads may not be able to make their payments and declare default. Excess default levels could drive a debt bubble. Trust me: this could happen. All those who have accumulated major debt during these last few years under the Federal Reserve’s easy money policy will suffer.
Ultimately, the impact will be felt on the U.S. economy and gross domestic product (GDP) as spending is curtailed. So enjoy it now, as the investment climate will become much more difficult down the road.
~ by George Leong, B.Comm.
This article was originally published at Investment Contrarians