Stephanie Pomboy: The Fed must reverse course
Posted: Tue Jun 03, 2014 12:15 amFrom Barron's Magazine:
http://online.barrons.com/news/articles ... 2621644240
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"I liken the economy to a car on a flat road that has no momentum. When you take your foot off the gas, the car just stops moving. That's essentially what the Fed is doing." -- Stephanie Pomboy
"The U.S. economy, propped up in recent years by multiple rounds of quantitative easing by the Federal Reserve, is not even close to being robust. So asserts Stephanie Pomboy, an economist who has been quite gloomy about the economic outlook—often ahead of the curve. Prior to the great recession, she correctly predicted there was trouble ahead. However, Pomboy acknowledges that, more recently, she missed the huge run-up in risk assets, including equities. These days, Pomboy, who founded the New York firm MacroMavens in 2002, is especially worried that the U.S. doesn't have enough strength for sustainable growth without another boost from the Fed. And, she says, too many investors have a false sense of security about the economic fundamentals. Two of her main investing recommendations—Treasuries and gold—reflect her caution.
Barron's: Let's begin with your macro view.
Pomboy: The No. 1 thing is that investors generally have underestimated the impact that QE [quantitative easing] has had on the economy and the degree to which it has supported growth. As a consequence, they have underestimated the cost the tapering [of monthly Treasury bond purchases by the Fed] would have, and that is starting to come into focus. People will realize that the economy really has not achieved any self-sustaining momentum and that it requires continued stimulus. I liken it to a car on a flat road that has no momentum. When you take your foot off the gas, the car just stops moving. That's essentially what the Fed is doing.
Eventually, people will start to connect the dots and say, "Hey, wait a second. We had five years of unprecedented monetary and fiscal policy, and the Fed did succeed in reinflating asset prices. Household net worth increased $25 trillion from the lows of the financial crisis, and yet we haven't generated a sustainable wealth effect." Maybe this is a dark place to go, but where would we be if the Fed hadn't succeeded in inflating household balance sheets to that degree? It is scary to imagine, because if you look at a chart of nominal consumer spending, which is 70% of GDP [gross domestic product], it has continued to decelerate, even in this period of unprecedented monetary accommodation and rampant financial-asset inflation.
http://online.barrons.com/news/articles ... 2621644240
Note: You can read the whole article via Barron's Facebook page: https://www.facebook.com/barronsonline
"I liken the economy to a car on a flat road that has no momentum. When you take your foot off the gas, the car just stops moving. That's essentially what the Fed is doing." -- Stephanie Pomboy
"The U.S. economy, propped up in recent years by multiple rounds of quantitative easing by the Federal Reserve, is not even close to being robust. So asserts Stephanie Pomboy, an economist who has been quite gloomy about the economic outlook—often ahead of the curve. Prior to the great recession, she correctly predicted there was trouble ahead. However, Pomboy acknowledges that, more recently, she missed the huge run-up in risk assets, including equities. These days, Pomboy, who founded the New York firm MacroMavens in 2002, is especially worried that the U.S. doesn't have enough strength for sustainable growth without another boost from the Fed. And, she says, too many investors have a false sense of security about the economic fundamentals. Two of her main investing recommendations—Treasuries and gold—reflect her caution.
Barron's: Let's begin with your macro view.
Pomboy: The No. 1 thing is that investors generally have underestimated the impact that QE [quantitative easing] has had on the economy and the degree to which it has supported growth. As a consequence, they have underestimated the cost the tapering [of monthly Treasury bond purchases by the Fed] would have, and that is starting to come into focus. People will realize that the economy really has not achieved any self-sustaining momentum and that it requires continued stimulus. I liken it to a car on a flat road that has no momentum. When you take your foot off the gas, the car just stops moving. That's essentially what the Fed is doing.
Eventually, people will start to connect the dots and say, "Hey, wait a second. We had five years of unprecedented monetary and fiscal policy, and the Fed did succeed in reinflating asset prices. Household net worth increased $25 trillion from the lows of the financial crisis, and yet we haven't generated a sustainable wealth effect." Maybe this is a dark place to go, but where would we be if the Fed hadn't succeeded in inflating household balance sheets to that degree? It is scary to imagine, because if you look at a chart of nominal consumer spending, which is 70% of GDP [gross domestic product], it has continued to decelerate, even in this period of unprecedented monetary accommodation and rampant financial-asset inflation.