The headline was innocuous, even a tad obvious. Yet when The Wall Street Journal reported Fed Likely to Keep Buying Bonds on Wednesday afternoon, it was a bombshell in certain circles. Fiscal cliff fears that had gripped the markets all week were suddenly less daunting, as traders relished the thought that, once again, the cavalry (a.k.a. Ben Bernanke and the Fed) would ride to the rescue with even more firepower at his disposal.
While this kind of reaction clearly falls within the realm of the don't fight the Fed axiom, for some investors it was also a not-so-subtle reminder that all is not well.
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"As long as the Fed is providing liquidity, it's a sign that something is dysfunctional, something is wrong with the marketplace," says Charlie Smith, the chief investment officer at Fort Pitt Capital, in the attached video.
"The Federal Reserve does not engender risk-taking. The Federal Reserve buffers collapse," Smith maintains, reminding viewers of the central bank's cardinal rule of existence. "It was created as a lender of last resort to provide liquidity when markets are not working."
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Smith gives one example of where the Fed's bond-buying project (which has come to be known as "QE") is currently distorting things: the housing market. He soberly points out that, "The Fed's money creation and federal backing for 90% of mortgage loans are what's keeping the housing market alive."
That's a far cry from the oft-repeated drumbeat of hope that housing is back.
While markets are still clearly addicted to ease and economic think tanks like the OECD are also calling on central banks to be ready to do more, Smith has a different take. "When the Fed has to keep cranking money into the system, it's a sign that people are averse to risk," he says. "It's a sign of dysfunction."
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