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Goldilocks Retirement Hatches New Golden Eggs Requiring Chicken Coop Extension

Like good little chickens, our hens laid many golden eggs the month of March.

Some of the eggs were much larger than the ones laid last quarter.

When they hatched, they were given a berth in the coop to begin laying golden eggs of their own.

We had to build an extension onto the chicken coop to accommodate the new hen, W. P. Carey.

The Hen That Laid The Golden Eggs

Like a good mother hen looking after her flock, Dr. Janet Yellen gave the markets what they wanted. Just what the good doctor ordered, in fact.

One Federal Reserve president after another made speech after speech, informing us that they felt conditions were right for another interest rate rise. It seemed they were sending up trial balloons to see how the markets would react. Otherwise, they seemed to be preparing the ground work for the next rise in the Federal funds rate.

Surprise, surprise! The following day, esteemed Chairwoman of the Fed, Janet Yellen, acting the good mother hen, inveighed, "now, now, children, let's not rush things."

With her speech at the Economic Club in New York, she put the brakes on another hike in the Fed funds rate.

Yellen's Reservations

Ms. Yellen has always conveyed the importance she placed on data dependency to the marketplace. Though she acknowledged in her speech that inflation was inching closer to the 2% level the Fed has been targeting, and employment numbers have continued to firm, she balanced those data points with others that still have her concerned.

Aside from the U.S., most major areas of the global economy have been slowing down. Even in the face of large new stimulus programs of quantitative easing in Europe by the ECB, economic activity is still slowing down.

In China and Japan, both of which launched huge monetary stimulus efforts, the effects, so far, have been muted.

Faced with this generally weak global situation, Ms. Yellen understands that if the Fed raised rates now while other major economies were lowering theirs, it would invariably lead to a stronger dollar. A fortified greenback would then make it more expensive for our global trading partners to buy our goods and services.

Not wanting to kill the goose that has laid the golden eggs, the Fed Chair stepped away from the cliff and clucked, "nyet" to increased rates. She even went a step further by implying she might raise rates only once this year, or perhaps not even until 2017.

Fearing the hit to the bottom line of our international corporations, she determined it would be better to err on the side of caution and put any rate increases on hold.

Doubling Down With Yellen

The most noticeable impact of the speech was immediately visible in the reaction of the marketplace. While the Dow Jones Industrial and the S&P 500 rose strongly, to new highs for 2016, the greatest impact was observed in the most interest-rate sensitive sectors of the market, namely the REITs, or real estate investment trusts.

From the recognizable bottom on February 10, 2016, to the end of the quarter, on 3/31/16, a period of some seven weeks, investors began bidding up what had been a very beaten-down sector.

For months, various pundits and authors made the case that if rates were set to continue rising, then the REITs would take it on the chin, due to their heavy dependency on the cost of money to expand their businesses.

I have maintained, for some time, that all businesses that expand their operations are dependent on the cost of money, some more than others, but dependent nevertheless.

My contention was that, as long as the glide path toward rate increases was smooth, slow and gradual, even REITs would be able to adapt to the new regimen appropriately.

After all, this Fed Chairwoman has been telegraphing her clear intent, all along. She has done nothing to make us doubt her. She has kept to her plan and is exercising proper caution to keep our economic recovery on track.

Fundamentals Mean Nothing Compared To The Fed

It has long been the case, and will continue to be so. Remember the trillions of dollars the Fed threw at the financial crisis to keep the banks from collapsing? Remember the trillions the Fed spent to buy Treasury bonds to inject money into the economy and lower interest rates?

The power of the Fed, with bottomless pockets able to create money out of thin air is enough to overwhelm even the toughest economic problems. Creating a wealth effect among investors was its primary aim, and it is succeeding.

What Can The Wealth Effect Accomplish?

The pump priming of the Fed aided the inflation in prices of all assets. As stock prices rose from a 57% collapsed dark hole, investors began to feel wealthier. This aura of wealth let them loosen the purse strings and consumer...


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