Cutter Family Finances: The Fed: What Is It Up To?
By: Jeffrey Cutter, February 19, 2014
How will the Fed’s decision to taper its bond-buying program again affect your financial future? Who knows?
What I do know is this. In December 2013, the Federal Reserve Open Market Committee (FROMC) made two very important decisions: to trim the monthly bond-buying program from $85 billion to $75 billion for January 2014, and to not make any additional decisions about further action until future meetings.
What I also know is that one of the most basic needs of any decision-maker, including those in the financial industry, is a clear understanding of the situation being faced. Unfortunately, those who are making financial decisions cannot possibly have a full understanding of current economic conditions. That is because the first decision made by the FROMC gave the markets the clarity that was long overdue, but the second decision took that clarity away.
A few weeks ago after another meeting of the FROMC, the Fed announced it will trim its bond buying even more from $75 billion per month to $65 billion per month between now and its next meeting in mid-March. Nobody knows what will happen in March, so we still have no clear understanding of this country’s most significant monetary policy, printing money to buy bonds. How can we see what is coming, how can we make decisions, when we know the rules can change at a whim every six to eight weeks?
Futhermore, we are not getting any help understanding this situation from the policy makers. The economy appeared to have cooled at the end of the fourth quarter of 2013, with car sales slipping, new home sales dropping back, durable goods diving, and employment really falling off. That trend has continued for the month of January, with lackluster reports released last week on jobs, auto sales, and housing. And what does Washington blame this on? The weather.
Hmmmm . . .I am not buying it.
So, we must ask ourselves if we think the Fed will hold steady at buying “only” $65 billion a month.
What about the outside noise from emerging markets, where the Argentinian peso is cracking, the Turkish lira is being demolished, and countries producing natural resources are losing ground?
We need to ask ourselves if we think the Fed will see enough weakness in foreign markets to hold steady, or perhaps even kick back up to $85 billion per month, providing the world with a boost.
And then there are the US equity markets . . . those barometers that seem so out of sync with our economy but provide a glimmer of hope for people casting about for positive signs. Lately the color of the screen has been red, filling people with anxiety.
And again we must ask ourselves if this will make the Fed step back in and “save the day.”
As mentioned above, the next meeting of the FROMC is not until March, at which time it might hold steady, increase bond buying or reduce it even more, depending on whatever it sees in the economy at that time. This is not monetary policy. This is micro-economic manipulation.
None of this makes sense. Unfortunately, we are forced to guess at the answers in order to form opinions and implement financial strategies. This is not an ideal investment approach for anyone who must rely on the markets for a secure retirement.
The Fed’s constant interference in the markets and its nonsense about making independent decisions at each meeting, “based on recent data,” leads to uncertainty. Uncertainty leads to volatility, volatility leads to anxiety, and anxiety leads to . . . well, you can fill in the rest.
Markets around the world finally seem to be grasping what we have said for so long. That is, the Chinese debt bubble is showing signs of popping, emerging markets based on commodities are feeling the heat, Europe has not recovered, and the US economy is barely muddling through.
Only now, nobody knows if the Fed will print more money to ensure another rally. In fact, nobody knows if the Fed will do anything because, as we know, it can change its mind at any time.
Cutter Family Finance readers, expect a lot more volatility in the days, weeks, and months to come. Do not rest easy because you see significant gains on your year-end statements. Many did just that in January 2008, only to suffer significant losses by year end because they had no strategy to get out of the market. Now is the time to take responsibility for your financial decisions and ask the important questions. First, what happened to your portfolio in 2008, a year of significant market volatility? Second, how will your current strategy perform if the same thing happens again? Third, what is your strategy to take advantage of the good volatility and avoid the bad?
Success often hinges on doing what is right instead of doing what feels right.The opposite is also true. Failure often follows a decision to do what feels right instead of doing what is right.
Investing is no different. In fact, the market is the ultimate battleground of emotions and rationality. And more often than not, doing what feels best turns out to be the exact opposite of what is best.
Profitable investing over the long run requires making decisions based on facts and logic. It also requires going against what feels right.
It’s going to be a long year in the financial markets! Remember, be vigilant and stay alert, because you deserve more.
Jeffrey Cutter, CPA, PFS is the managing partner from Cutter Financial Group, LLC (www.cutterfinancialgroup.com) which provides private wealth and investment management through low risk, low volatility successful financial solutions. He can be reached at firstname.lastname@example.org.
Investment advice is offered by Horter Investment Management, LLC, a Registered Investment Adviser. Insurance and annuity products are sold separately through Cutter Financial Group, LLC. Securities transactions for Horter Investment Management clients are placed through Pershing Advisor Solutions, Trust Company of America, Jefferson National Monument Advisor, Fidelity, Security Benefit Life, and Wells Fargo Bank, N.A. 1. http://tinyurl.com/lywo4j7