This blog post originally appeared on RealMoney Silver on Aug. 16 at 7:45 a.m. EDT.
On Friday, I was again with Melissa and
"Fast Money Halftime Report" crowd, and, as is typical, I had loads of fun.
Melissa started by asking me my thoughts about the impact of current monetary policy on economic growth. I responded by saying that
policy has likely done as much as it can and as much as it should:
- Zero-interest-rate policy stopped the Great Decession and the economic free-fall, but it has failed to create jobs.
- Quantitative easing has also helped to halt the financial crisis, but it did little to encourage small-business hiring and expansion.
- TARP stopped the carnage in the banking system, but it did little to encourage lending.
I added that there are unintended consequences of monetary policy. Low interest rates hurt the savers' class, especially the elderly. Meanwhile, well-positioned large corporations such as
International Business Machines
, which borrowed short-term money at 1%, and
, which borrowed 10-year money at 3.5%, are aided by easy money.
The market's upside and the economy's downside are constrained and currently mired in a vortex of liquidity, tax and regulatory traps. These factors are undermining confidence and hurting valuations and probably won't change until the administration adopts a new playbook. The Fed can print money, but it can't print jobs. We need some combination of a transformative and focused jobs program, a cut in taxes and a simplification of the financial and health care regulatory initiatives. In essence, the current administration's policy has the effect of
economic and business conditions. In some ways policy is even more of a constraint to growth than a hike in interest rates would be.
By contrast, the downside is supported/protected by reasonable valuations and by the financial and operating strength of our largest corporations (especially of a S&P kind), which are generating record free cash flow, have cut costs to the bone and have taken advantage of a hospitable, friendly and cheap debt market. Hedge funds have de-risked, and retail investors have abandoned domestic equity funds, so who is left to sell? Meanwhile, inflation is quiescent, and short-term interest rates are very low and are likely to remain so for some time to come.
With corporations in such strong shape but with the consumer sector still deleveraging (and exposed to the continued risk of lower home and equity prices), a lumpy and inconsistent economic recovery that feels bad (because of
) seems in order. At times, it will seem like we are reentering a recession; other times, it will seem as though economic growth is accelerating. These conditions will provide a setting that is hard for investors to navigate, particularly when algorithm-based high-frequency-trading strategies disrupt markets (at times), as their trading activity fills a light-volume void.
There are plenty of crosscurrents, but my baseline expectation remains for a range-bound market. I went on to say that, despite this tug of war, a reversal to better fiscal policy can resolve the range-bound market to the upside.
My pal/buddy/friend, Najarian, asked me about dividend paying stocks, and I suggested that they are valuable, particularly in light of their low cost of funds.
Finally, Joe Terranova asked me what I liked, and I said that, though we are likely range-bound, I have been adding to both the bank,
Bank of America
, and non-bank,
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long C, BAC, PRU and LNC, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.