Monday, December 8, 2014

Keep an eye on the Fed's accelerating asset sales

More than half of these Fed asset sales occurred between the end of October and the end of November. But the balance sheet remains an impressive $3.8 trillion -- a huge difference with the pre-crisis monetary base of $820-$830 billion. It is interesting to note that even at these comparatively modest amounts of high-powered money, the pre-crisis U.S. monetary policy was very expansionary: the federal funds rate was fluctuating around 3 percent while the inflation rate was accelerating above 4 percent. 
These excess reserves are now being drained by the Fed's bond sales; they have been cut by $286.1 billion from their peak of last August. There is still plenty of cutting to do, though. Just think that during the pre-crisis period from January 2007 to June 2008 banks' average excess reserves were fluctuating around monthly levels of $1.9 billion (sic). That is a far cry from the $2.4 trillion we have now. 
Technically, the Fed can keep the federal funds rate within its current 0-0.25 percent range for some time because of large excess reserves in the interbank market. 
But the Fed has to work fast to destroy the inflationary potential of excess liquidity before the actual inflation begins to edge up. 
Equities are still my preferred asset class -- provided the portfolios are carefully reviewed toward a defensive posture. Also, think of putting some of that yellow stuff under your Christmas tree.
DYI Comments:  The Fed's are in a race against time to reduce to a significant degree their balance sheet to be prepared for the next recession.  Knowing when that will occur is a bit of a guessing game for we've been in recovery (of sorts) for a long time.  So time is no longer the Fed's friend as they will be looking for every opportunity to reduce their Treasury secuities.  I'm not as worried regarding inflationary pressures as deflationary forces on balance are much stronger than the Fed's desire to create 2% inflation.  Simply stated they need bullets available to shoot at the next recession whenever that arrives.

His comment about Gold is timely but for DYI it is the mining companies that are the current bargain.  From peak to trough the miners are off around 70% clearly a market smash worth buying into for the long haul.  Please note this is NOT an "ALL IN" recommendation as the Dow/Gold Ratio at 15 to 1 continues to be a bit pricey, but less so due to the sell off, but pricey nevertheless.
 
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AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 12/1/14

Active Allocation Bands (excluding cash) 0% to 60%
83% - Cash -Short Term Bond Index - VBIRX
17% -Gold- Precious Metals & Mining - VGPMX
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
 0%-REIT's- REIT Index Fund - VGSLX

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