A Fed fail and a euro 'fix'

This week's Fed circus tells us mainly that the Fed is wrong again. But Europe may have found a way to keep the euro solvent (for now).

By Bill_Fleckenstein Jun 22, 2012 2:05PM

Image: Federal Reserve Building. Copyright: Hisham Ibrahim, CorbisThis week, all eyes were on what the Federal Open Market Committee and Federal Reserve Chairman Ben Bernanke might come up with on Wednesday to make everybody happy.


But, in an interesting wrinkle, European debt markets that day saw their own variation of Operation Twist, in that Italian, Spanish, and Portuguese debt rallied, while Germany's was sold.


The reason seems to be that, behind the scenes, Germany has decided to let the European Financial Stability Facility lend directly to the PIIGS, those problem nations of Portugal, Ireland, Italy, Greece and Spain. I say "seems" because that is the current back story, though Germany is still officially denying it (at least through midweek -- more on that below).


Obviously, we will have to see what happens. But if Germany has, in fact, caved on the issue, the European Central Bank will still be required to provide a giant amount of stimulus to make the whole system run. If those two things occur, then Europe will have effectively created a Federal Reserve of its own, and it will probably be able to kick the can down the road a ways.


Angela we have heard on high

The Fed eventually delivered the news that Operation Twist would be extended through the end of the year, and it said that it was prepared to take further action (due to the fact that it had lowered its growth outlook). Markets across the board sold off hard, except for bonds. But shortly thereafter, a headline passed on Bloomberg which claimed (though it certainly didn't look "official") that German Chancellor Angela Merkel had said the EFSF may be allowed to buy bonds, which sparked a rally in pretty much everything (again, except bonds).


That was followed by Bernanke's news conference, where he basically had to admit that the Fed's economic optimism of the prior few meetings was misplaced (i.e., it was dead wrong, as usual).


Even though I have been saying this for 20 years, it still boggles my mind that the people running the Fed can be so amazingly and demonstratively incompetent, yet they are entrusted with unequaled power to change the course of history and people's futures based on their pet theories (and bolstered by ego-boosting reinforcement from the applause meter).


Although Bernanke is not the egomaniac that his predecessor, Alan Greenspan, was, he has done no less damage. (On the other hand, had Greenspan not done what he did, Bernanke probably wouldn't have followed the course that he has.)


When I wrote my book "Greenspan's Bubbles," I figured that in a few years (and certainly by now) the whole world would have seen what a catastrophe Greenspan and the Fed were, and the tremendous negative influence they have had on the country. But here we are -- four years, trillions of dollars' worth of damage and millions of ruined lives later -- and people are still unable to see the obvious. It is just incredible that something this evident continues to be unrecognized by so many people the world over.


It's best to learn from other people's mistakes

 One person who does get it is a friend and fellow investor (who prefers anonymity), to whom I have given the moniker, "Mr. Skin." With well over 40 years of very successful experience in investing, he is a welcome and regular contributor to the "Ask Fleck" section of my subscription site, FleckensteinCapital.com, where he recently offered this bit of historical perspective, and a lesson worth noting:


"(June 15 was) the 50th anniversary of my first loss (and lesson) in the stock market. I was a freshly scrubbed, fish-eyed new voter in 1960 and voted for JFK. He had imagination and was young, compared to Nixon, who looked like a crook (even at that early date). . . In any case, Kennedy was going to the moon and the 'aerospace' and 'tech' stocks took off into a bubble that resembled the tech boom of the late 1990s.


"Of course, at my tender age, it looked like a fool-proof way to extend my college passion for poker and bridge. The stock market soon became the bold, new way to get rich. I connected with an equally new Merrill Lynch broker and started to learn how to speak 'market.' He 'advised' me to buy some Air Space Devices, a hot new issue. I bought it a $12, certain of a big hit.


"Unfortunately, Kennedy was having a spat with the steel industry. The union had jacked up a wage demand and the companies, led by Roger Blough, chairman of US Steel (X), decided to hike prices for steel. This threatened to cause inflation at a time when politicians worried about such things. So, Kennedy ordered the FBI to go after steel company executives, and the stock market immediately cratered, dropping 30% within a couple of months (April-June 1962).


"I was scared out of Air Space Devices at $2 for a loss of $10 on a $12 trade. The lesson was simple: understand what you are doing. The broker hyping Air Space Devices was hungry for the fat underwriting fee. If I had bothered to read the prospectus, I would have learned that the company had nothing to do with the aerospace/moon shot industry. The damn company made ladders for fire engines and was taking advantage of the aerospace stock boom to raise capital at a huge premium to reality. Lesson learned!''


One of the things all successful investors have learned the hard way is that nothing is foolproof, especially if you are the one who might be acting foolish. And, as Mr. Skin notes, knowing what you know and knowing what you don't know, i.e., doing your homework, is the best insurance against foolishness there is. Too bad Bernanke et al. don't seem to have learned that.


At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
Jun 22, 2012 8:32PM
Bill, what I see going on is beyond "disgraceful".  I do not care about the 'markets', anymore.  No one invests in them as they are known to be 'controlled' and 'manipulated'.  It is 'impossible' not to recognize this.  I am disgusted  with our government and 'all' political' branches.  We are 'disgraced by the President and the Attorney General and the all 3 branches of government. It makes me ill,  The SEC is a total and complete joke. 
Jun 23, 2012 11:04AM
Who gave the Federal Reserve (Private for Profit Corporation) authority to give away American resources (money)? Since 2009 - the Fed has given Europe over $5Trillion - gee why not give that money to the American people and start a real economic recovery? Bastards are only interested in protecting their profits and their status as elitist

Jun 25, 2012 8:43AM

Who's the biggest borrower in the world?  I think it's the US Gov't.  Who has set the rates at near 0% - I think it's the biggest borrower. . . now isn't that nice.  I think I'm going to try to set my own rate next time I go to the bank!!!  Who's paying the price - my 86 year old mom who saved her whole life and now gets a check for $150 every 6 months on her IRA...keep up the good work Ben.


Jun 25, 2012 12:33AM
"the leprechaun" put it in a nutshell for all to read. The rich like George Washington put his future and life on the line for our country. He served. Today your lucky if you find a senator or congress person who's children served during recent wars. Morals are lacking which is a sure sign of a fall from the top. Rome lasted longer before corruption & bad morals brought them down. One nation under god was much better than one nation under trust no one.
Jun 25, 2012 8:40AM

Hey Clownhead..

Taking money from producers to give new cars to lees producers, and non producers is as wrong as confronting me in a dark alley with a gun and taking the money that way.

You have NO CLAIM morrally on someone elses money NO MATTER how much they have and how little you have.....period!


Jun 25, 2012 7:07AM
you keep hearing  that the bail out the feds  did  kept things  from going  farther down .  what would of happen if  we had let  them  all fail .  the only thing that gained from the  bail out  was  the stock  market  car  prices  have  not  dropped gas prices went  sky  high  since  the  feds  slowed down  a bit  prices  seem to be coming down a little  banks won't lean money  because the intrest rate is so  low they don't  want  30 yr   locked in  rates  at 4% or less lookes like the bail out was  more dangerous  than  good  maybe i am looking at this all wrong but the only people i see who gained from the  bail out  was  big  money   the  stock  market  and  banks  the euro has been  kicking the can for over a year  now  could it  be  that  nobody  can print enough money  to fix this  problem that it is beyond  any  help
Jun 24, 2012 10:08PM

 "because before 1913 we had a constant bubble and bust economy with runs on the Banks."


We didn't have fully amortizing home loans until 1932. We didn't have warehouse credit facilities until 1936. Both of these inventions afforded banks to lend up to 115% of their assets and still retain enough cash in house to accommodate a major account closure. When these attributes fell in line, there was also stabilization in housing values- the primary reason for the runs on banks. Glass Steagall enacted during that period, putting the onus on banks to be forthright and integral. We should have shut down the Fed then.

Jun 24, 2012 10:32PM

Europe will have effectively created a Federal Reserve of its own, and it will probably be able to kick the can down the road a ways.


God forbid that they actually do anything to address the real problems when you have the option of kicking the the can down the road a ways. Cowards.

Jun 24, 2012 10:42PM

Merkel is worsening Europe's crisis because countries need growth, not austerity, to pay down their debt, billionaire investor George Soros said in a Bloomberg Television interview yesterday.

``Merkel has emerged as a strong leader,'' Soros, 81, said in an interview with Bloomberg Television's Francine Lacqua at his London home. ``Unfortunately, she has been leading Europe in the wrong direction.''


Wrong direction for who? Merkel's accountable to the German citizens not the EU.

Jun 23, 2012 6:08PM

Good article, especially the part about Greenspan, the housing boom began in my area about 1998, by 2001 home prices were rising 20% per year and nobody was selling, so the new construction tracts were booming as prices rose each year. The Fed had kept things in check by keeping rates above 6%, this is why the Reserve was created, because before 1913 we had a constant bubble and bust economy with runs on the Banks. Instead of raising rates to quell the bubble in 2001 Greenspan dramatically dropped the rates to below 2% flooding the already over heating market with easy cash. We all know the story, rates stayed below 2% till Bush was re-elected and then dramatically shot back up to above 5%, the damage done was un-reversible. Instead of the Fed doing what it was intended for, Greenspan did the opposite by abetting in the expansion of the bubble, the people have lost control and have allowed the Banks and Wall Street to manipulate our markets as they did before the Reserve and the Glass Steagall act. Our government runs fine when the right people are in office, lets not make the same mistake.

Jun 25, 2012 9:43AM
The Fed and Europe are solving this debt crises by printing money. This is inflation. With fixed low wages and high unemployment inflation will reduce the purchasing capacity of the consumer. Unemployment will increase.
Jun 25, 2012 1:14AM
The second American Revolution is going to be a blast!

The only way out of this will be what Canada did.  They limited unemployment insurance, reduced their environmental laws  so they could increase their use of their natural resources which created jobs and increased their money flow into the country.  They have an unemployment rate below 6%. 


Their homes are not under water due to a bubble like in America and Europe as they required a higher downpayment on that home up front.


The problem with America is we allow the Gov't to tie our hands behind our backs.   Maybe that is why we have 50% of the population on Gov't subsidies.  People just gave up and now want the rest of us to hand over what we make to them.  


It is time that people learn to fend for themselves and get off the Gov't tit.   Conversely it is time the Gov't dries up the tit.   There will be a lot of bawling and whining just like a calf or a foal when they are weaned, but it is necessary for America (and Europe) if they want to survive.


Jun 22, 2012 8:42PM
I have long held the opinion that Greenspan was grossly incompetant and his now infamous greenspan speak ( lowercase deliberate now because he is undeserved of even that distinction ) , aka undeciferable mumbles, grunts and wheezes was just a cover for his inept meddling and lack of communication and social skills.
Jun 23, 2012 1:44PM

The give away of tax money will end this country.

Thanks to Ben and Obama

Jun 25, 2012 9:07AM

Doesn't matter whether it's Merkel, Obama, or any other world leader or want to be leader. They get elected according to what is termed democracy, and in most cases there is little to choose from. The same machinery to get one party and individual in power is the same machinery used by the losers. And that machinery is corrupt working under the guise of democracy and the good of the electorate. Sure there is a leader, but surrounding them is the party, administration, bureaucracy, interest groups, lobbyists, big business,media, financial instiutions, and the list goes on. And each is likely serving it's own interests - after all, whatever is wrong is the cause of some other group - in the same way as being caught in a traffic jam - it's always the rest of the traffic, not oneself, that is to blame. The entire financial and social mess through the world is certainly not improving and until for once the various leaders and organisations that lead,  manage to forgo their petty self-serving interests and selfishness to work on a cohesive solution, the situation will only get worse. It's unbelievable that with all the technology, information and history that the human race has amassed over the recent few thousand years, without the thin veneer of governance and democracy, humanity is no more advanced than the tribes it sprang from in the african jungles. Some days it appears so wasteful that we have but a mere 70 years on the planet. But looking at the past handful of decades, in another sense it may be a blessing - at the end of the day, let's hope we are alone in the universe - the converse is a much more embarassing  option. Humanity is such a disappointment to itself - good luck with the future, despite the incredibly bleak outlook. Such a waste of a species with so much potential.

Jun 25, 2012 11:51AM
Diluting the money supply by printing massive amounts more by the Federal Reserve Bank is nothing more than an unapproved TAX on all Americans who have a dollar in their pocket.  The result of the devalued dollar is always the same:  Products & services cost more.  Do you remember when a gallon of gasoline cost $0.28?  (Yes, that's TWENTY EIGHT CENTS!)  The Federal Reserve Bank should at LEAST be audited to expose where all that money is going!
Jun 24, 2012 10:03PM

"That makes me wonder. why would they be giving millions of dollars in bonuses to the executives? Why would they not, pay their debt down, instead?"


What assets do they have? Irresponsible banks lent big business huge sums at nearly no interest. Big business terminated personnel, shipped operations overseas, sold the machiney and facilities and implemented "preferred stock" which pays first in a default. They are really giving each other cash and prizes and could care less about default because they get more cash if they do. They are likely short their own companies through trusts and hedge funds.


The best thing America can do now is to change the currency, dedicate new money to new business enterprises that dop it all here and compete the big business platforms into forced competition. They have nothing to compete with so it directly caves the preferred stock values in and forces sale of bonds and stocks for re-animation cash.

Jun 23, 2012 10:44AM

I think its almost funny the Business community is sitting on trillions, and want the Federal Bank to give them a stimulus.


Jun 25, 2012 1:12PM
"Diluting the money supply by printing massive amounts more by the Federal Reserve Bank is nothing more than an unapproved TAX"

Absolutely. In fact, several of the key components of our crises and issues are directly out of the Inflationist play book. The main objective is not debasing the currency, its creating complex financial instruments and forcing the public to honor them as they recover the economy. It's a game. Old Money wants to keep living separate and above the rest of us. this is how it's been for centuries. The objective now is to support the variables that compromise those instruments. There is no value in Elitism. If you want prestige, work an honest day for it and let others bestow it on you.
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Image: Bill Fleckenstein, MSN money

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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