The Fed Lays an Egg

by | Sep 22, 2011 | General

Policy errors remain the biggest risk for investors

The term “policy error” covers a lot of ground and the errors take many forms. Here are a few recent examples:

  • Bernanke led investors to believe that more monetary easing was likely—and then didn’t deliver. 
  • Grid-lock in Washington. There are two ways to stimulate the economy using fiscal policy—spend more or tax less. The Democrats don’t want to cut taxes permanently and the Republicans don’t want to increase spending, even temporarily. In fact, each party advocates policies that will hurt growth: Dems want higher taxes, and the GOP wants less spending. (Yes, this is over-simplified, but roughly right)
  • European grid-lock. The European Union requires unanimous agreement for any big decisions. A perfect recipe for doing nothing.
  • The European Central Bank spent most of this year raising interest rates as the economy weakened. Result: German stocks fall nearly 40% from the peak in May.
  • Again, the ECB refuses to do what a central bank was designed to do—buy assets when others won’t, in this case, Mediterranean government bonds.

That’s a long list of screw-ups and we can’t afford many more.

Here’s what we will be watching: 

  1. The Euro. If it falls in value there’s some hope that the ECB is doing the right thing. A rising Euro kills off what little growth remains in Europe.
  2. Commodities: If they continue to fall the odds increase for a double-dip recession in the US.
  3. S&P 500 at 1120. Below that level we see the potential for much larger losses. 

Here’s what the S&P 500 looks like since the first of the year, showing a drop of 10%. It feels like more. 

Our move into cash and fixed income in August proved to be right (so far) and we will do more if the 1120 level is violated on the downside. 

Policy errors are not to be taken lightly. Unlike stupid business decisions (see Netflix and Hewlett Packard) bad policy affects everyone not just those making the mistake. 

Businesses eventually fix mistakes or they disappear. Governments and Central Banks are with us forever and their mistakes take a lot longer to make right. 

Best regards,

Daniel A. Ogden

Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.

It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise.

To the extent that a reader has questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional advisor of their choosing.

A copy of our Form ADV Part II regarding our advisory services and fees is available upon request.

Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.