US Federal Reserve can achieve its objective of recovery

  • Business
  • Thursday, 05 Feb 2009

AS recession rolls on, the Federal Reserve has come out with the big guns. The Fed is now conducting monetary policy in ways that neither the US economy nor any other economy has seen before. It is very broad based, very comprehensive and very aggressive.

The objective is to simply get the US economy recovering as soon as possible no matter what it takes.

Not only will the Fed employ all available tools, the Fed will employ ALL TOOLS, whatever they may be, to achieve this objective.

Will the Fed achieve its objective? iCapital is confident that it will. More importantly, what does this mean for investors?

As the Fed achieves the objective of getting the US economy to recover, the New York Stock Exchage (NYSE) will rally and start a new bull market.

What is worrying is that many investors will miss this new bull market that is in the making now.

This week, iCapital takes an unusual step by analysing the bull market that started in 2002 – see chart.

This bull market came about after the NYSE was devastated by the bursting of the technology bubble in 2000.

The technology bear market lasted a lengthy three years. It was a global bear market.

Although the Dow Jones Industrial Average fell 39% during the period, it did not not capture the full extent of the bear market.

The Nasdaq Composite plunged 80% in this bear market. Although unnoticed by most people, in terms of length, the 2000-2002 bear market was longer than the bear market of the 1930 Great Depression.

The world economy was adversely affected by the technology recession.

In response, the Fed aggressively slashed its federal funds target rate. What is more interesting is the strong five-year bull market that developed after that.

At its peak, the 2002-2007 bull market saw the NYSE almost double its 2002 lows.

For the Nasdaq, the same bull market saw a bigger percentage rise than it had plunged before.

All in all, after a lengthy and rather severe bear market, the bull market returned inevitably.

Some may scoff at this bull market scenario but it further confirms the obvious fact which, during periods of gloom and doom, does not seem so obvious: that after every bear market, there is always a bull market.

iCapital would like to draw readers’ attention to the difference in the 2002-2007 bull market, which was that it coincided with the emergence of China as a major source of global economic growth and the start of the global economic decoupling process.

The current bear market has brought the NYSE back to its 2002 lows and the September 2008 credit squeeze has led to a sharp and sudden global economic slowdown, leading many people to conclude that the decoupling theory has been effectively debunked.

iCapital does not subscribe to this belief and people who believe in this have missed the whole notion of what decoupling is.

Basically, iCapital is still of the view that the rest of the world, led by China, has decoupled from the US economy.

What the others have totally missed is that decoupling is a process and not just a one-time event.

The decoupling is continuing even as the world economy finds an effective solution to the current US-led financial crisis.

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