There’s a thoughtful op-ed by Gavyn Davies in the FT today (Why did Bernanke change his mind). The Fed has a dual mandate of targetting maximum employment consistent with stable prices (which they take to mean inflation no greater than 2%). What’s become clear following last week’s announcement is that the priority the Fed attaches to each of these goals is likely to subtly shift in favor of tolerating higher inflation in the interests of achieving greater employment. Bernanke himself went to great pains to argue that no such change was contemplated, and traditionally Fed chairman have always argued that low inflation is the best way to support job growth.
But the Fed has little choice but to shift its emphasis, if for no other reason than one of its two mandates has been missing its target for several years now. Bernanke talked about skills atrophying as the long term unemployed become unemployable, and therefore move from cyclically unemployed to structurally so (a miserably dry way to describe a sad loss of many people’s ability to earn a decent living). Republicans have jumped all over this as being pro-Obama politics, which it is although almost certainly that’s coincidental. The Fed would be far too aware of the political season to do anything overtly political and risk being seen as less than independent.
The politics though are for others to contemplate. What does seem plain is that an open-ended and potentially long-lived QE 3 is probably negative for the US$ – especially so now that the ECB has enough firepower to support bond markets far longer than speculators can bet on a crisis. It’s probably positive for equities, although here it’s important to own names you’d like regardless of the near term direction of the economy. And the Fiscal Cliff isn’t receiving the attention it most likely will after the election when the focus shifts to whether Congress will avert a 2013 recession or not.
Our biggest position remains the gold miners ETF (GDX) which we like both because many miners are cheap to NAV but also for the QE 3 reasons described above. Both the Fed and the ECB are focused on reflation as their number one goal. Fiscal policy is likely to be at least modestly restrictive, but it seems that we’ll get QE (4,5…57) until employment improves. The Fed’s response to weaker growth is quite plain. When eventually growth does pick up expect those familiar “Fed behind the curve” headlines to last longer than usual. In fact, the most bearish case for gold is if the Fed fails. It’s not an attractive outcome to contemplate, and not one that’s likely in our opinion. So we like GDX as the most efficient way to align ourselves with government policy.
We also continue to own Corrections Corp (CXW) while we wait for further developments as the company finally decides to convert to partial REIT status, a change likely in early 2013.
Most recently we invested in Energizer Holdings Inc. (ENR) which, at under 11 times next year’s earnings and with strong market share in both batteries and razors is attractively priced. The stock has been weak recently, and there are some questions about the long term outlook for disposable batteries. But management is still guiding to $6-6.20 per share for FY 2012 earnings (their fiscal year ends this month). They also continue to buy back stock, having repurchase $268 million in FY 2011 and $211 million in the first 9 months of FY 2012 through June. It’s likely they’ll dedicate substantial portions of their free cashflow to buying stock over the next couple of years, and so we’ve been accumulating a small position at current levels.