There was a crucial central bank action taken yesterday. A surprisingly hawkish Fed decided at its October meeting to end QE and keep a mid-2015 outlook for the first rate hike. But here is the crucial part: The Fed statement included the language, ‘The likelihood of low inflation has diminished.’ So since the last policy statement, they are ignoring the deflationary signals that abound everywhere. They did not address falling commodity prices such oil prices falling from $100 a barrel to $80. There was no acknowledgment of the 10 percent equity selloff that we briefly experienced, and there was no acknowledgment of the falling money supply growth.
The Fed also did not comment on falling home prices, which has taken place for the past four months in a row. They also bypassed commenting on subpar economic data such as the weak Durable Goods Orders, which fell 1.3 percent. So the truth is that the deflation, which is associated with ending QE, is now the prevailing force. But the Fed is completely missing the whole picture. They believe that they can end the extraordinary monetary stimulus with impunity. And this is where the big opportunity will come for patient investors who go against that grain.
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