Wiedemer: Fed to Print More Money If Stock Market Drops 15%-20%

Tuesday, 15 May 2012 11:19 AM

By Forrest Jones and Kathleen Walter

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A sluggish economy may prompt the Federal Reserve to roll out a third round of stimulus known as quantitative easing, says Robert Wiedemer, financial commentator and best-selling author of "Aftershock."

Under quantitative easing, the U.S. central bank buys assets held by financial institutions, flooding them with liquidity in the process with the aim of pushing interest rates down and encouraging investment and hiring.

“If you saw the market drop 15-20 percent, I think the Fed will definitely move in," he tells Newsmax TV in an exclusive interview.

Turning to other global woes, he said European countries should resist the urge to scrap austerity measures.

He explains that while painful now, austerity will lead to better days ahead for countries like Greece.

Doing away with belt-tightening measures like layoffs and spending cuts will run up debts, fuel inflation down the road and offset any growth that would come from spending one's way out of recession.

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"I think investors are looking for some sign that this is not going to be a never-ending bailout, that we are not just going to keep borrowing money and printing money," Wiedemer said. "As much as there might be some pain now, people are going to want to see some change in the long-term."

"I think a breakdown in Greek commitment to honor its obligations to the ECB, which they are already talking about, I think it could cause huge problems," says Wiedemer, who recently released an updated edition of his best-selling book, "Aftershock."

The European Central Bank (ECB), the European Commission and the International Monetary Fund have arranged billions of dollars in bailout money for Greece.

To tap that rescue funding, Greece has agreed to austerity measures designed to streamline its bloated public sector and trim down debts.

Many politicians in parliament say they've had enough of austerity, with the issue of belt-tightening blocking political parties from agreeing to a coalition government, fueling fears Greece is closer to being shown the door to the eurozone.

In France, voters ousted President Nicolas Sarkozy recently and voted in socialist Francois Hollande, who says he favors growth over austerity, which markets take to mean spending will increase to get the economy going again regardless of the debt and inflationary effects.

Wiedemer warns that backlash against austerity is present everywhere, just more visible in Greece and France due to recent election results.

"It's not just in those countries. I think it reflects a growing trend in all of Europe," says Wiedemer, a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management.

"We see those countries because they just had elections, but you are hearing the same things being talked about in Spain, Italy and other countries as well."

Economies worldwide continue to battle headwinds.

In the U.S., the labor market remains weak, with the economy adding a dismal 115,000 nonfarm payrolls in April.

China's economy is slowing as well, which could bode poorly for emerging market nations whose growth depends on Chinese demand.

"I think the emerging market boom is a bit of a myth. I think its driven more by China than people want to admit," Wiedemer says.

Headwinds from Europe and China could dampen U.S. recovery.

"Europe is coming up again, I think China is going to start slowing up — McDonald's just released in its earnings and revenue announcement that same-store sales in China are only up 1 percent," Wiedemer points out.

A sluggish economy may prompt the Federal Reserve to roll out a third round of stimulus known as quantitative easing, under which the U.S. central bank buys assets held by financial institutions, flooding them with liquidity in the process with the aim of pushing interest rates down and encouraging investment and hiring.

The Fed has pumped $2.3 trillion into the economy via two rounds of easing since the downturn several years ago, and critics say such policies represent little more than printing money out of thin air that lays the seeds for inflation down the road.

Don't rule it out, Wiedemer says, especially if the stock market falls.

While the Fed's official role requires it to control prices and maintain optimal employment, quantitative easing juices the stock market as a side effect — always a good thing in an election year.

"I think money printing always helps the economy but it also helps create a lot of inflation. I don't think we are behind it," Wiedemer says.

"I think if you saw not so much the economy slowing down but if you saw the market drop 15-20 percent, I think the Fed will definitely move in."

Investors shouldn't fret too much over a so-called U.S. fiscal cliff looming large on the horizon.

At the end of the year, tax cuts are set to expire while automatic spending cuts are set to kick in, a combination that could quickly siphon hundreds of billions of dollar out of the economy, dubbed by markets as the fiscal cliff.

Congress and the White House would have to extend the tax cuts, but don't expect a return to political brinkmanship that surrounded the near disastrous debt-ceiling fiasco in 2011, which almost threw the country into default.

Dealing with the fiscal cliff involves extending expiration dates and no real changes to policy.

Plus politicians don't want to deal with the drama in an election year.

"One thing that never keeps me up at night is worrying about whether Congress will find a way to borrow more money. Something tells me they'll figure out a way to do it," Wiedemer says.

"I'm sure there will be some fits and starts and issues that will slow it down, but I think in the end, they're going to figure out a way to borrow more money."

Political rhetoric that always surrounds tax and spending cuts will arise and will rattle markets somewhat, although it won't inflict lasting damage, Wiedemer says.

Investors, meanwhile, should stay in dividend-paying stocks, some commodities and gold, and some choice bonds.

Gold isn't a productive asset, as Warren Buffett describes it, meaning it pays no dividends, produces no earnings and provides no interest.

Yet it does serve as a hedge against inflation, and globally there is demand for it, which makes it an attractive asset to have in a portfolio.

"I think that gold will continue to go up," Wiedemer says.

"I think it will continue to be volatile. I think this year we'll see another 10 percent increase just like we saw last year."

About Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.


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