Fighting the Fed - 09/21/10

• A contagion in confidence will limit the effect of monetary policy.
   

The prevailing bullish view from thoughtful money managers I speak to is that the Fed will do whatever is necessary to promote domestic economic growth and that stocks, in the fullness of time, will respond to this policy.

In other words, there is an inevitability of a bull market because growth will come at any cost.

As I discussed in "A Matter of Trust" yesterday, it is my view that there is a limitation on monetary policy, as a contagion in confidence has dulled its effect and will likely be with us for some time to come.

It follows that economic growth will be uneven and inconsistent in the years ahead as the last cycle's sources of growth (specifically residential and nonresidential investment) are not readily replaced by other drivers of growth.

Away from the demand factors, the demise of the shadow-banking and securitization markets importantly limit the supply of capital and credit, and there are the headwinds of our fiscal imbalances (local, state and federal) and the policies of populism (costly regulation and higher marginal tax rates).

So, color me more bearish, as stocks have risen toward the top end of my projected range fueled by momentum-based investors -- those who worship at the altar of price momentum continue to buy up shares.

The market debate today is not whether there will be a double-dip. (There will not be.) The market debate today should be what does one pay for a shallow and lumpy economic recovery?

In my book, 13x on 2011 S&P profits is the maximum investors will pay!

It is said that investors shouldn't fight the Fed.

But I am!