New face, old thinking for the Fed?

When Ben Bernanke hands over command at the Federal Reserve, it likely won't be to someone who'll change policy and solve our problems. Only a revolt in the bond market is likely to force real change.

By Bill_Fleckenstein Nov 16, 2012 3:01PM

Microphone on a lectern with a line graph © Image Source/PhotolibraryNow that the election is past, I am looking for the market, the media, and (if we're lucky) even politicians to focus on different -- if not more important -- things.

 

More likely, however, is that the news will now become dominated by the political posturing, bickering, leaks, brokering of agreements, accusations and brinkmanship surrounding the upcoming automatic tax hikes and spending cuts otherwise -- and inaccurately -- known as the fiscal cliff.

 

The logrolling should certainly get interesting. But it is nearly impossible to see how the twists and turns in this process will work out, other than to say it will probably result in a last-minute kick of the proverbial can down the road, with most of the tax hikes sticking but few of the recommended spending cuts taking effect.

 

In other words, thinking about this will be a waste of time for investors until we get closer to the final compromise, as the outcomes will be uninvestible until then.

 

She has such small shoes to fill

Second, with the election decided, there is no longer any angst that Federal Reserve Chairman Ben Bernanke will be replaced by someone who tends toward tighter monetary policy. And based on stories we've seen, he most likely will not seek another term.

 

I suspect current Fed board member Janet Yellen (read her Fed bio) or perhaps William Dudley (read his Fed bio), the president of the New York Fed, will be his replacement. Both are potentially even more reckless than Bernanke.

 

At this juncture I would say the leading candidate would be Yellen, and I bring this up because on Tuesday she gave a speech in which she said that the Fed ought to tie its zero-interest-rate policy to hitting its targets on inflation and full employment, rather than just picking some date. I would not at all be surprised if that is the direction the Fed goes, even before she has the chance to become the first female Fed chief.

 

Of course, the inflation that is a consequence of unbridled money printing, both here and around the world, has so far been ignored as folks continue to worry about some sort of deflationary accident in Europe, or perhaps even in America.

 

Meanwhile, inflation is making headlines, as I have noticed in Election Night exit polls as well as recent headlines about the inflation rate in Great Britain, which is running at about 2%, while their 10-year bonds yield not much more than ours, at 1.75%.

 

It's time to play 'The Price Is Wrong'

I cannot imagine that this situation of inflation outpacing bond yields will go on indefinitely. At some point, bond markets here and around the world will crack under the weight of inflation or stagflation. But there is a psychological component to how either of those problems is perceived, and for the moment it would appear that most folks think inflation is temporary.

 

Thus, bonds continue to price in a substantial bona fide decline in prices, otherwise known as deflation, which has not happened and will not happen. The only real question is when psychology will change, and that is not knowable in advance.

 

Nonetheless, I have decided to take advantage of the recent spike in the bond market by getting short a modest amount of 10-year bonds. I will risk a small loss to see if the bond market is actually in the process of having a "failed rally." But I will use a stop order to limit my losses if I'm wrong, because this is all guesswork.

 

As for the postelection economy, there is one thing I do know: If you liked the last four years, you're going to love the next four.

 

King World News

My latest interview with Eric King covered a lot of ground, from class warfare, to the fiscal cliff, to real estate, to the prospects for precious metals miners. Interested readers can listen to it here

31Comments
Nov 18, 2012 8:48AM
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The ultimate definition of Tyranny is the abuse of a power that no one person or small group of people should even have over others. I can’t think of a better example of that than the money printing and expansion of the monetary base that the Federal Reserve has done in the last four years, and continues to do at an ever faster pace. Janet Yellen and her kind are financial assassins.

Nov 17, 2012 11:26PM
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Mr. Fleckenstein says it the way he sees it.  Bravo.  I'm surprised he still has a job, since Americans live in a fantasy world.
Nov 18, 2012 11:26AM
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See what is there to be seen. we will be indentured servants to the national debt very shortly.In 2014 soc sec goes into the red. 47 million are on food stamps. We are poised to add 60 million more to food stamps and the welfare and low income entitlements by legalizing 15 million illegals+( their wives and 2 children will be coming to the USA)..Military spending is out of control. We have rendered basic math politically incorrect.Our CEO's have graduated from the best colleges and universities in the nation.Yet they conduct themselves as though they just fell out of a tree. Their reckless and unregulated greed have rendered them dysfunctional.They have no idea of their role in preserving civilization. We are a nation divided . Within 4-5 years the dollar and our way of life will collapse. Americans will be going to the school of hard knocks. America has committed suicide. 
Nov 18, 2012 3:11AM
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In 1913 our government created the Federal reserve to prevent the constant bubble and bust economy of the 19th century, runs on the banks, fear and panic were always a breath away. When used as intended the Federal reserve is your best friend and can equalize the power struggle between Politicians, Banks, the super wealthy and Wall Street, by regulating interest rates and money supply. Banks, the super wealthy and Wall Street spend millions on Lobbyist each year, influencing our politicians who influence the Federal Reserve Bank bending it to their will. Until the Lobbyist go, this will continue to be the case, nothing will ever get fixed the the bubble and bust will continue indefinitely. Many European nation saw this problem decades ago and outlawed Lobbyist, in France if your caught Lobbying a politician, you will go to jail, it's nothing but bribery. Until Lobbying is outlawed, the Fed will be manipulated.
Nov 18, 2012 10:11PM
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Four more years of the giant talking head......
Nov 18, 2012 1:55PM
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It will no difference who does or says what.  It is not difficult to figure out.  The 'landscape' was set before the election in the electoral college.  There is not one reason to be surprised nor get angry over this and that.  There was no recovery and there will not be. This guy in office is a photoshoot and a con man. He has the right audience in doing exactly what he needed to.  You have to know what that is.

 

I do not listen to the nonsense with pundits.  Just have a thought that all H may break soon.  He will be found out and hope noone is idiotic enough to make him what he is not.  Leave him alone and let the dye be cast by those he conned.  You allowed it and now live with it.

Nov 17, 2012 10:33PM
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Stop the CEO rape of all profits and stock options and lower the price of Deisel fuel the way it used to be and that makes all the difference in the world!!!
Nov 18, 2012 10:19AM
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more free money for the banks THANKS TAX PAYERS!!!
Nov 18, 2012 2:30PM
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Unfortunately, a change in the economic policies in the US will have to happen the way Gorbechev ended the old Soviet Union. The change agent must appear to go along with the current system until he gets into that power position from which he can change it.
Nov 19, 2012 11:59PM
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The final act of failed governments is to loot the treasury.
Nov 18, 2012 7:40PM
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This country is being lead into socialism willingly with "free stuff" with a fiscal clift hanging over  your heads.  This isn't about other countrys spying on us, it is about them taking over and throwing our Constitution of the United States into the toilet and implementing the KGB Socialism,with free cars, trucks, homes, etc., etc.  I am not paying for others free stuff courtesy of any administration.  You people wanted free stuff and with it came the fiscal clift.

And why did our inner political circle flood this country with illegal aliens, to sway the vote in their favor.  Those who control the game spit on your domain!
Nov 18, 2012 3:17PM
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There is tremendous pressure on Congress to get their collective arses together and promote pro-growth policies and reform the tax code. The sequester will not happen but what about tax policies or a specific plan for reforms? The uncertainty continues, making business reluctant to add payrolls, give raises, and stink some of that billion dollar curb money into the economy. Where does that leave the small potato investor and small business owner, such as myself at different investment decisions? I'll tell you, in another round of a holding pattern...more stagnation ahead, Let's move Forward,...at a snails pace!
Nov 28, 2012 6:34PM
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You are probably right that Bernanke's successor will be Yellen, since Obama appointed her. What a tragedy for the US to have someone carry on the same stupid policies pursued by Bernanke! The successor should be Richard Fisher of the Dallas Fed, the only voting member of the Fed Reserve with any brains.
Nov 18, 2012 8:17PM
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The banks are set up in a way to discriminate against whoever they want to. You can see that from all the special loans people get because they are who they are and not from a checklist. Yes, Yes, different rules in every state and so it allows for discrimination without looking for credibility. You can see this from all the city’s that are having a terrible time paying for the employees they hire without looking through a checklist before they hire. If you know someone, you are in, and that is what it looks like to most of us that can’t get a government job. It doesn’t matter if they have a record or have had a bad time paying bills because of the lack of education. It is who you know.
Nov 18, 2012 8:17PM
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There is something that concerns me today. Why hasn’t there been a checklist created for what the banks and the economy need to move forward? Oh, don’t tell me Basil-III has anything to do with the economy.

 Why isn’t there a checklist, for the banks to follow, that is not made by the F.E.D.? Why is the F.E.D. giving so much money to banks without getting paid a better interest rate? The banks have so much money that they don’t need any help from the government. The money is just sitting in the vaults without doing anything for the economy. The banks are not helping the economy in any way so why do they get all that money? Shouldn’t the manufacturing companies be the ones getting that money so they can hire new employees to make products for China’s people. I know they need our products and can pay us for a change. If you really want to help the people than freeze all wages and reduce banker and broker pay considerably. Every corporation practically is trying to break up all the unions to pay everyone less so we all can enjoy a better life but how can we do that with the way we support the banks right now? It shows a one sided or discriminatory preference for banks and federal and state unions. So far the banks have not proven that they are helping the economy one bit and that shows me and a lot of other people that they should not be getting paid the kind of salary they get for incompetence. With the governments help they have allowed the banks and brokers free rein to do what they want and that is make as much money as possible hurting every bank account holder, stock holder and retirement 401 k holder in the process.
OK, I get it they don’t have the ability to pay off the loans they created, and it will be some time before they do. But to me they are using the money for the algorithms they created to rip off every penny or 10000th of a penny they get through the numbers game they have created and the government excepts as legal even though it resembles a racketeering type bookie method of making money. It use to be called skimming and it was very illegal. They call it high frequency trading so it doesn’t resemble the old method of taking money without giving it back. The president can create a presidential order to stop high frequency trading but doesn’t and I’d like to know why not.
Do you know that when the banks and governments price out the people for land, we will no longer be able to pay the taxes because they will be too high? There will no longer be any healthcare because there will no longer be any people working in those hospitals and clinics. No amount of troops brought in to quell the anarchy will save lives. When that happens, every government official will lose their job and all you will have is anarchy. Or, will the government mandate that every state and federal official become a soldier to help protect the job they have that helped in creating the money issues we have today? That sounds like another way of being discriminatory. Plus you have to have tax money to pay troops. Our incomes keep going down, not up because of corporation’s inability to sell products that we cannot afford now let alone with all the money printing going on today that will bring higher costs to everything, not just food and gas. We will no longer have any electricity because it will be too expensive. Will you be able to guarantee the money you put away for your children’s college or welfare will be there 
when they need it? I don’t know how because even your own class of people will find a way to take that savings from you, just like they did over the last 30 to 40 years.

By John.
Dec 2, 2012 4:02PM
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the fiscal cliff is looking better and better all the time.  call it a good start.
Nov 19, 2012 7:53PM
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Well, Fleck, if you're so frigg'n smart, why the hell don't YOU apply for the job?
Nov 19, 2012 2:48AM
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Newkid, Sweden had the same problem with Banks being overly tight with lending, so they took progressive action and charged the banks a 1/4 cent interest on Banks holding money in the federal Bank, very quickly the sphincters relaxed and the money flowed, the following year Sweden had a 5.5% growth rate. Answers to problems can be found, but it takes forward thinking to find them.
Dec 3, 2012 10:20AM
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FUBAR Alert

China targets bank executives' perks in anti-corruption drive

No more luxury cars and 11 other rules for Chinese banking officials will go into effect in December as China cracks down on corruption. Public fury over executive extravagance is fueling the drive.

Maybe we should do the same here???

Public opinion is stronger in China than it is here in the Land Of the Freeloading Banksters, robber Barons sitting around on their milk arses thieving $85 billion per month...

Your all a bunch of sheeple being herded to the cliff...

Nov 18, 2012 1:10PM
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LCK1, Maybe Caroline's net worth doubled from 2008 to 2012 because the stock market doubled.( DEET DA DEE ) Mitt's probably doubled to, and Her tax rate was probably around 9% just like Mitt's
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ABOUT BILL FLECKENSTEIN

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This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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