Roger Lipton: Here Comes the Fed's Next Test


Roger Lipton

Roger is an investment professional with decades of experience specializing in chain restaurants and retailers, as well as macro-economic monetary developments. He turns his background, as restaurant operator and board member of growing brands, into strategic counsel for operators and perspective for investors.

An archive of his past articles can be found at

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Economics seems like such a complex subject, as represented by PHDs and pundits. Some of you may remember Martin Zweig, a very successful money manager who made his name by predicting the 1987 crash. More than that, his investment mantra, “Don’t Fight the Fed” has proven to be one of the simplest, but most durable, tools in capital management.
While everyone seems to be celebrating two quarters of 3% GDP growth (not “great”, but better than 2%), and debating whether the economy will continue to strengthen or weaken once again, everyone seems to be forgetting that Central Banks around the world have enlarged their collective balance sheet by something like TEN TRILLION DOLLARS since the financial crisis of 2007-2008. In an effort to stave off a deflationary collapse, the Fed, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Peoples Bank of China have created new currency (something like “cryptocurrency”), and bought all kinds of fixed income securities as well as equities. This has, as designed, inflated the bond and stock markets, keeping interest rates very low (still negative on trillions of fixed income securities) and elevated the stock markets to record highs.
Janet Yellen and other economists are mystified as to why all this newly created capital has not stimulated inflation in wages and groceries, ignoring the fact that inflation has been huge in the capital markets, real estate, art and other asset classes with the notable exception of gold (so far). The “wealth effect” for the upper class at least, has allowed the for the purchase of a Van Gogh painting for a cool $450 million and apartments in the Big Apple for $60-100 million. Grocery and apparel prices have not inflated, but the creation of $10 trillion of fresh capital has had its intended inflationary consequences in the form of asset prices.
Now comes the test, as the Central Banks begin to “normalize," reduce their balance sheets, and pull back the Keynesian accommodation that helped to avoid an even larger financial crisis back in ’08. Our SIMPLE point here: If Central Banks provided $10 trillion dollars of freshly printed currency, which no doubt was a major contributor to the steady (though anemic) economic growth of the last seven years and the straight line upward in the stock and bond markets, it seems reasonably predictable that the removal of that “accommodation” will reverse a lot of that economic progress and asset inflation.
Do not despair, however. In our view, the stock and bond markets will not collapse, and THE REASON IS SIMPLE. THE CENTRAL BANKS WILL CAPITULATE, and back off their intended “normalization." Within a matter of months, the sale of securities by our Fed, and the reduction of purchases in Europe, Japan, China, and Switzerland, will create a year to year reversal of something like a trillion dollars, annualized, of buying power, and that will weaken the worldwide economy. At that point, the politicians will scream “do something”, and the Central Banks will back off their QT (Quantitative Tightening).
The result will be the “can kicked down the road” once again. Unfortunately, though, each financial “heroin hit” has to be bigger than the last to maintain the economic “high” (anemic though it may be), so the accommodation will need to be even bigger. Of course the long term downside consequences will be even more dramatic but that is a story for another day. The bond market, with the ten year note still at a historically low 2.6%, (“disbelieving” the strengthening economy), and the gold market which has been firming over the last month or so (anticipating the next round of accommodation), may well be signaling exactly this scenario.
Regarding Bitcoin: Now down about 50% from its peak, we stand by our analysis. (The YouTube link below humorously summarizes the situation).  Blockchain technology no doubt will have its applications, but Bitcoin and its 1,300 brothers and sisters, amounting to hundreds of billions of dollars of newly “mined” currency, is not going to have material staying power. Watch this video, more truth than fiction.

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