The monetary printing presses, that is. As expected, the Federal Reserve Board of Governors announced today the resumption of its “Quantitative Easing” program. That’s a nice academic euphemism for “printing money.” The Fed will be reaching out into the capital markets and buying six hundred billion dollars of Treasury bonds. For reference, that’s about half of current annual federal borrowing. The objective of the policy is to pull down longer-term interest rates in the hope of stimulating borrowing. Banks will be able to use the newly created money supply to meet the new loan demand. It all sounds just perfect…on paper.

We have been writing, talking and warning about this type of monetary intervention for nearly two years now. Our view all along has been the same: In the near-term, don’t worry about it that much. There is so much slack in the economy that inflation isn’t likely to explode any time soon. We wrote that opinion in January 2009, right after the Fed allowed its balance sheet to explode in Q4 2008. Inflation has, in fact, been nearly nonexistent since then.

The problem now is that the Fed is nearing the end-game. This latest — and likely, final — round of artificial market intervention is the proverbial hail-Mary pass into the endzone. Actually, it’s worse. A last-second heave of a football that misses just means that you lose the game that you were already losing. A miss by the Fed means that the loss will be even worse. A failed massive monetary intervention can have lasting repercussions in the form of long-term inflation and higher interest rates. A successful hail-Mary by the Fed would lead to a nice strong economic recovery. Be careful what you wish for — expanded bank lending and economic turnover will also result in an expanding money supply and inflation.

If the Fed succeeds, inflation will begin to rise soon, and interest rates with it. If the Fed fails, Congress will take over and spend money it doesn’t have. We’ll have a longer recovery, and slower long-term economic growth. And we will still have long-term inflation.

Is there a “Goldilocks” scenario where it all works out just right? Perhaps, but we do not want to position our portfolios in the hope that everything works out just perfect. Hope is not a strategy.

Our approach is to position our portfolios for robustness. A robust portfolio is one that behaves itself under a variety of outcomes. This is no time to make a major bet on a specific outcome. Don’t bet big on a quick recovery; don’t bet big on a second recession; don’t bet big on anything. Be careful; preserve capital; wait for opportunities to present themselves. We have often compared our investment approach to a baseball hitter awaiting a “fat pitch.” If they’re not giving you anything to hit, just stand there and accept a walk. But, if they throw you one down the middle, swing at it. (Especially if you’re Edgar Renteria with two men on base in game 5 of the World Series!)

We got fat pitches to hit in late 2008 and early 2009 in the form of cheap muni bonds, junk bonds and energy stocks. We don’t know what will be cheap next time, but we hope to jump on it when we see it.

For a more complete The operative word for our portfolio strategy overview of our investment tactics, read the October 2010 newsletter.

In general, our gut feeling (and analysis) lead us to believe that the end-game of the Fed’s attempt to rescue the economy is more likely than not to end badly. We are positioned conservatively, and suggest our readers consider doing the same.