Don’t fight the Fed
The Fed is simply too powerful to fight. PIMCO’s view on the subject of fighting the Fed.
- We are skeptical that fiscal austerity alone is sufficient for all eurozone countries to grow and remain solvent. We thus expect the ECB to continue supporting the euro area with liquidity in 2012.
- Recent central bank policy in China is oriented toward stabilizing growth in a political succession year, while balancing lingering inflation and medium-term systemic risks.
- Investors may want to hedge portfolios by looking to select emerging markets with the ability and willingness to cut policy rates both from a cyclical as well as structural perspective.
For decades, financial firms, captains of industry and investors who have bet against central bank actions have mostly lost. Hence the credo: Don’t Fight the Fed.
Once again, this fight-the-tide “trade” is the topic of debate: Should you bet that the Fed’s colossal effort to reflate asset prices will end in colossal failure? What about the tidal wave of central bank activity abroad? Will it, against historical precedent, end in failure, too?
Confronted by more than 40 acts of interest rate and policy easing in six months’ time by the world’s central banks, investors in late 2011 and early 2012 have decided not to fight, bidding up risk assets and providing a reprieve from months of drubbing. Never mind that investors’ long-time friend – the central banker – is acting in response to very troubling developments, not the least of which is the speeding up of debt deleveraging in Europe and slowing in the global economy. Heck, there’s nothing that the central banker’s printing press can’t cure!
If only it were that simple. Deleveraging is a process, not an event. It takes time and all the central banker can do is help it along. Politics and public resistance to fiscal austerity complicate and slow the process, leaving the central banker to do the heavy lifting.
Full reading here.