Putting Monetary Policy in Second Gear

In our audio recording on Monday, we emphasized the illustration of the difference monetary policy takes when it is time to shift into second gear.  I like the illustration, personally, since I can almost hear the sound of the motor changing just slightly as the slope of the hill moderates.  The slope of the hill obviously is the difficulty that has to be overcome for this particular hill (the economic recession).

The housing depression has indeed been the steepest hill that has to be climbed.  Following the meltdown in 2008, the Federal Reserve wisely shifted monetary policy into a low gear.  Pundits always imagine that there is some hill too steep for the Fed to conquer, but it has never proved to be the case yet, and we're hoping it never is.  You simply DON'T bet against the Fed.

But very obviously, this is the steepest hill the Fed has ever had to climb.  So they put monetary policy into a low gear revving the motor up to its maximum power, and they have been very slowly making progress since that time late in 2008.  You can see in so many indicators how that peak of the recession was made in that panic environment, and even though the "market" didn't bottom out until March 2009, internally, October 2008 was the time when most stocks made their final low.

Then, in 2010 and 2011, Mr. Market certainly made us sweat out the corrections, but in both cases, the Fed made sure the "pulling" power of the gear was at its maximum level - especially in the housing market as they force-fed mortgage rates lower.

Ladies and Gentleman, this truck has more gears.  Bull markets typically have 3 phases, and sometimes a fourth phase, so we're still trucking up the hill.  For every new gear that is used, the news will be better, and slowly, some of those scared investors shivering on the sidelines will bring some of their trillions of dollars back to stocks.  Some skeptics scoff at the fact that this bull market is 3 years old, but our message is that we are just now shifting out of first gear, and there are at least 2 more gears before this bull market has to worry about too much speed and worry about starting to shift in the other direction.

Don Hays

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