Poll Suggests Rich Families Are Pulling Cash Out of the Market

The world economy is in a fragile state. The Federal Reserve’s planned unwinding of its quantitative easing program has essentially been postponed indefinitely and may, in fact, be impossible to pull off. Experts worry that, if quantitative easing goes on for too long, a severe inflationary crisis might take place.

Bubbles in housing and student loans appear to be on the verge of popping, and the individual phase of the Obamacare implementation has been a total disaster, raising questions as to what aspects of the law will still be in place by the time the business mandate takes effect in a year. In these uncertain times, CNBC is reporting that wealthy families appear to be (quite rationally) sitting on cash and investing less of their wealth into the market. Government and Federal Reserve policies are causing confusion and preventing an economic recovery from taking place.

The Upside-Down Economy

The stock market remains in record territory, which seems disturbing given the current unemployment crisis, shrinking family incomes, the rising prices of consumer goods, and the fact that consumer sentiment just hit a two-year low. Record high stocks hardly present a buying opportunity, and the above-linked poll suggests that wealthy families are sitting on increasing levels of cash holdings, which are nearing 40% of their portfolios.

Citi’s analysis of those same wealthy families’ portfolios shows that their investments will likely under-perform, producing unimpressive returns. The polled families did indicate that they expected interest rates to rise next year, implying that some market movers anticipate that the Fed will begin tapering soon. However, this seems unlikely, given the fact that the Federal Reserve is set to lose money if interest rates rise. Citi interpreted the poll answer about interest rates, combined with expectations that the market might improve next year, as a slightly positive indicator, ignoring the significance of wealthy investors’ current unwillingness to bring their money off of the sidelines.

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QE’s Stimulus Effect Isn’t Working Anymore

Bridgewater’s Daily Observations expressed concerns that quantitative easing may be losing its potency, “we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.” After the Fed played chicken with the idea of tapering off of quantitative easing back in September, but balked, it lost significant credibility in the market.

The Federal Reserve’s failure to express a clear quantitative easing exit strategy has investors on the edge of their seat, uncertain as to when interest rates will normalize. Meanwhile, Obamacare’s implementation has been chaotic, as millions of Americans are suddenly losing their insurance and facing steep premium increases. All of this negative information seems oddly disconnected from the record stock market, a phenomenon that has taken place in other nations during the onsets of inflationary and hyper-inflationary crises throughout history.

A crisis is due at some point, because the market simply has to clear out the malinvestment and bad debt caused by the Fed’s relentless pursuit of recklessly low interest rates. However, there are so many ominous economic indicators circling all at once that it’s hard to predict what type of disaster will rear its head first. For now, the monetary policy errors and regulatory uncertainly discourage investment into new businesses, thus preventing the economy from naturally recovering from the crisis that began in 2007 and still plagues the world to this very day.

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