John Goltermann: The Experimental Economy

From Zero Hedge:

On the heels of last Thursday’s Fed announcement, there has been much commentary on the whys and wherefores of a new quantitative easing (the so-called QE3). Rather than re-hashing well-covered ground, I want to instead discuss the potential effects and unintended consequences of this policy and how it may impact the investment landscape going forward.

Suffice it to say that the Fed had its reasons. QE3 evidences a belief in the so-called “wealth-effect” – the idea that one will spend more if he/she feels wealthier – and the Fed also believes it can contain any negative consequences. However, others would argue that it’s another shot across the bow of our foreign lenders that we are willing to engage full-out in a currency war as this policy clearly weakens the U.S. dollar. Because the Fed has embarked on a path with little historical precedent – where a central bank has signaled the intent to expand its balance sheet as much as it needs to – we are all now part of an experimental economy.

The point of all this is that while financial markets celebrate the effects of QE3 and bid up all sorts of asset prices, the wealth effect won’t necessarily benefit everyone equally and may further contribute to an income disparity that acts as a drag on the real economy. This has a self-reinforcing political effect as more and more people are forced to sign up for government benefits as their opportunity set diminishes, as interest rates are kept at zero and as economic growth remains low.

Ultimately, it is not our job to criticize Fed policy but rather to manage assets as best as we can, given how the Fed views the world and what it is likely to do. Our investment process on the equity side is to establish positions in well-managed businesses with good assets that have pricing power, but that can also survive and thrive in a slow-growth environment. It is also important to know that the current Fed policy has special consequences and risks.

http://www.zerohedge.com/news/experimental-economy