Mission Creep and the Fed

In military jargon there is something referred to as Mission Creep. According to Wikipedia, it is “the expansion of a project or mission beyond its original goals, often after initial successes. It “is usually considered undesirable due to the dangerous path of each success breeding more ambitious attempts, only stopping when a final, often catastrophic, failure occurs.”

You can find this mission creep in the business world as well. I’ve been warning about the dangers of the Federal Reserve keeping rates so low for so long. Quantitative easing was necessary in 2008 to stem the financial crisis. When that goal was met the Federal Reserve continually expanded their goals, resulting in an ultra-low interest rate environment longer than anyone would have imagined.

This mission creep will ultimately lead to the negative unforeseen consequences that are bound to occur. I believe we’re finally starting to see the beginnings of undesirable effects occurring with many notable investing legends also warning of the consequences recently.

Investing legend Stanly Druckenmiller has also been warning of the consequences we will face.

“Over six years when you have zero rates and quantitative easing you move investors out the risk curve,” he said. “You cause corporations to start acting in bizarre ways.”

“All you do when you’re doing this is you’re pulling demand forward to today,” Druckenmiller sad Tuesday at the annual DealBook conference.

“This is not some permanent boost you get. You’re borrowing from the future. I think there’s been such a misallocation of resources that this has gone on so long and unnecessarily (and) the chickens will come home to roost.”

That is what I’ve been alluding to pointing out the trillions in stock buybacks, mega-mergers and increased leveraged debt. On the investor side it’s included aggressive leverage, chasing yield and pushing market valuations such as the Tobin Q Ratio and Price to Sales Ratio to historically high levels. If past history is any indication, such aggressive behavior always leads to sharp market declines.