Last week I was back in New York, meeting with reporters from CNN, The Wall Street Journal and other media outlets. One question kept coming up: Should we fear the Fed? I think that is a very good question, and here's my answer: No, we should not; and yes, we should.
If you listen to my show, you know that I compare the economy to an escalator and the stock market to a yoyo that we play with while riding that escalator. The important thing is not the ups and downs of the yo-yo, but the direction of the escalator / economy. The Fed recently said it would continue to pump $ 85 billion into the economy every month, which moves that escalator in the right direction for us. Right now, the Fed is not to be feared.
What happens if the Fed decides to taper? I think we'd see a 10 percent correction in the market. The people who are riding the gravy train will probably take their profits and go home. But the decision to taper is like a stamp of approval on the direction of the escalator. The Fed would not taper if the economy were tanking. If a tapering announcement by the Fed does cause the market to drop by 10 percent, I do not see it as a problem, but as a huge buying opportunity. In the short run, even if it tapers, the Fed is our friend.
But the Fed is creating a massive imbalance right now. Interest rates have been held at record low rates for a very long time now. The Fed also has billions and billions of dollars of bonds on their balance sheet. We've never seen this situation before. No one knows what the consequences may be, but I think the Fed is creating a big bubble. One to be feared. I think the momentum we have right now will last until at least the middle of next year, but I believe we'll have a big, bad bear market in 2015. I think the market could drop 50 percent, just like in 2008. We can not keep pumping $ 85 billion into the economy without consequences. We have to pay the piper eventually.
The Fed may be our friend right now, but I think we should keep our eyes on the escalator. Make sure you have an exit strategy, so you have an opportunity to ride the economy while it goes up, and to get off when it goes down.