By Tom Bradley

“We get by with free markets in all other walks of economic and financial life – why let the price of money itself be dictated by a handful of State-appointed bureaucrats?”

In his September 29th letter, Tim Price of PFP Wealth Management is referring to one of my biggest concerns about the investing landscape. Governments and central bankers are trying to micro-manage the economy, and as a result, are not letting the excesses in the system be corrected or flushed out. Monetary stimulation and accommodative policy was an ‘imperative’ for financial stability in late 2008 and early 2009, but it’s morphed into an ‘impediment’ to the normal functioning of the world economy. By trying to prop up growth and asset prices, bankers are simply bouncing the bubble from one area of the capital markets to another.

It’s not surprising then that central bankers have an ego problem – they think they have more impact than they do. When people keep telling you how important you are, you start to believe it after a while. Since Alan Greenspan cozied up to President Bush and tried to eliminate the economic cycle (specifically the down parts), market commentators, economists and dare I say fund managers have put too much emphasis on the movements of the U.S. Federal Reserve.

As background to my comments, I would encourage you to read an excellent blog by Kara Lily at Mawer Investment Management entitled, Frogs in the Pot. Her piece is both meaty and entertaining.

Kara writes: “Collectively, we in the investment community seem to have adopted a new relationship with central banks…and this is puzzling. Twenty years ago, it would have been inconceivable to think that central banks would be this directly involved in asset markets. Now hardly anyone bats an eye when billions of dollars of quantitative easing are suggested. Central banks are behaving in unprecedented ways, with unprecedented scale, in accordance with an idea that is still, ultimately, one giant experiment. And yet investors appear to have acclimatized to this new world. Many simply trust that central banks will provide a balm to all woes.”

As we bounce through a more volatile period in the market cycle, long-term investors need to be reminded that what the Fed does in the short term has very little impact on long-term returns. Indeed, I’ve put together a list of things that are more important than the Fed and therefore deserve much more of our attention:

  • Price to earnings multiples
  • Profitability
  • Balance sheets
  • Sector growth
  • Competitive advantage
  • Brand
  • Innovation
  • Winner of the Super Bowl
  • Management Proportion of women in senior management
  • Capital intensity
  • Capital allocation
  • Dividends
  • Integrity
  • Governance
  • Input prices
  • Hemlines
  • Suppliers
  • Political and regulatory environment

No egos or media hype among them.