The short answer is YES! We have heard some FedSpeak in the last week or so that gives me cause for concern, and ergo the title of this post. It appears we may be facing a future when a government “independent” entity takes over the free market.

Last week, Fed Chair Janet Yellen floated the idea that the central bank should buy stocks and other long-term assets to mitigate a downturn in the economy. Taking a page out of the Bank of Japan and Bank of Israel, the Fed now appears to be considering whether it is a good thing to directly intervene in equities. Apparently central bank insanity knows no bounds. Even though these “techniques” have been attempted in Japan for a considerable period, not only has there been no discernible economic benefit, there are some that believe the policies are detrimental to the economy.

Toward the end of summer in #ZeroInterestRatesMatter – Party Like It’s 1999, we discussed the risk the Fed is taking in our economic structure (unintended consequences) by keeping interest rates so low for so long. I remain very skeptical about where we are in the capital markets….near highs in both the stock and bond markets. In our investment recommendations, we are encouraging appropriate portfolio balance in terms of risk, and very cautious on the average maturity of bonds.

In his October Investment Outlook, Bill Gross equates monetary policy with gambling with our economy, and talks about the “Martingale System” approach. He goes on to illustrate that ” that low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth.” In other words, these policies are actually hindering economic growth, not stimulating it.

All one needs to do is examine the results of the Japan “experiment,” both in terms of their attempts at monetary and fiscal policies…they are simply NOT WORKING! However it seems to be the default philosophy of policy makers and economists to say we haven’t done enough – we need to do MORE! We all know the definition of insanity authored by Albert Einstein:

“Insanity: Doing the same thing over and over again and expecting different results.”

Bill Gross goes on to suggest “at some point investors – leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives.” If this begins to occur, you may see some vulnerability in both the stock and bond markets.

What does this mean to you, your 401 (k), and other investments you have? While our crystal ball is as cloudy as everyone else’s, there are a number of actions you can take:

  1. Take an objective looks at your risk positioning across your portfolios and review your balance. Consider reducing equity exposure in your Asset Allocation.
    • Many people within 5 – 10 years of retirement I see have relatively aggressive risk postures. It’s critical to be prepared for another potential downdraft like we experienced in 2000 and 2008 if your time-frame is in this area.
    • This is not a forecast, just common sense. The closer you get to the need to draw on retirement funds, the more caution you should employ.
  2. Reduce Interest-Rate Risk – pay close attention to the maturities of bonds and fixed income in your portfolios – reduce the length of maturity to reduce interest rate risk.
  3. Maintain greater than normal Cash positions.
  4. In a very recent Grant’s Interest Rates Observer conference in New York City, another very well-known money manager, Jeff Gundlach, had an interesting observation: he ‘thinks the world of monetary and fiscal policy is about to pivot. He decided that the narrative that benchmark interest rates around the world would stay lower for longer was “getting quite old.”’
    • He cited several reasons: inflation is picking up, the dollar did not strengthen after the Federal Reserve raised rates the last time. Also there’s this:“In the investment world when you hear ‘never’,” ( as in rates are ‘never going up’), “it’s probably about to happen,” said Gundlach, who is CEO of DoubleLine Funds.
    • For the first time in a very long time Gundlach is looking at “TIPS,” or bonds that benefit from inflation (Treasury Inflation-Protected Securities). Something to consider for your portfolio.

If you don’t have a trusted financial advisor to help you with this, we recommend a professional with the Garrett Planning Network.

Of course we are always happy to help at Financial Freedom Planners in an objective, fiduciary manner without conflict of interest!

“It doesn’t take a fortune to build one”


About Charles Roberts, CFP®

Founder & CEO, Financial Freedom Planners™
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