The Fed knows nothing: Who knew?

Why so many put so much trust in our central bank's central planners is a mystery, given how out of touch they seem to be. So don't be lured in because it seems like everything is under control.

By Bill_Fleckenstein Jan 25, 2013 3:00PM

Dollar bills floating over U.S. Capitol © CorbisA New York Times article caught my eye, since it described a subject near and dear to my heart, namely, the lack of omniscience at the Federal Reserve.

 

Headlined "Days before housing bust, Fed doubted need to act," the Jan. 18 article by Binyamin Appelbaum walked through how the Fed responded to the early part of the housing bust, beginning with what the Fed was thinking in August 2007. It makes it quite clear that the geniuses in charge of our monetary policy were completely unaware of the fact that the housing bubble had been the economy, among other important issues.

 

What we knew they didn't know then

That is naturally par for the course, since Fed "logic" always starts from a false premise, that being that bad things in the economy just "happen" and it is the Fed's job to fix them, rather than understanding that it is the Fed that keeps precipitating our problems through its money printing.

 

Just for grins I went back and read some of the columns on my subscription site (www.fleckensteincapital.com) from August and September 2007. I must admit it was pretty shocking, though somewhat entertaining (in a sick sort of way) to see just how oblivious so many were to something so obvious.

 

To revisit some of the highlights (or lowlights, as the case may be), the first half of August 2007 featured Bear Stearns (remember it?) announcing more problems with one its funds, rampant carnage in the housing construction and finance sectors, Japan's Ministry of Finance stating that "the subprime issue won't have an impact on the U.S. economy," my own statement that the Fed "does not understand how dangerous the problems are" (this was during a week in which it appeared the Fed was behaving responsibly, but as we now know, that was only because it had no idea that the housing bubble was the U.S. economy), followed by basically a blank-check bailout from Fed Chairman Ben Bernanke.

 

As I, and many others, said ad nauseam at the time, the financial meltdown created by the Fed's idiotic policies was bound to create problems that would stay with us for a long time. Looking back at that period through a "real time" lens (both in my own writings and The Times article) really drives home how incompetent the Fed is.

 

Returning to the present, we have the Fed monetizing government debt at the rate of about $1 trillion a year. Other central banks are charting a similar course, one in which they would be thrilled if they could get inflation to 2%. (In fact, they probably wouldn't be totally unhappy with it going higher.)

 

Given that inflation is a lagging indicator, and massaged through the absurd assumptions made by the official counters at the Bureau of Labor Statistics, one can be sure that by the time the Fed hits its target, the real cost of living will be rising by somewhere between 5% and 7%. At some point, the bond market is going to revolt over this.

 

Things may get better before they get worse

But for now, money printing has certainly put a bid in world stock markets. World economies are rebounding along with the market, to some degree, and for the same reason. Thus, apart from the always-present potential for another (and a bigger) flash crash, markets are in the process of doing everything they can to suck in more money.

 

That is a long way of saying that, as frisky as world stock markets feel now, they could get a lot friskier and dopier before the bond markets of the world force the central banks to act like adults.

 

However, readers should remember how dangerous individual stocks (or the stock market in general) can be. Money printing results in all sorts of deceptive "action."

 

Just look at Apple (AAPL). In March 2012, I wrote a cautionary column ("Is it time to bet against Apple?") while others were euphoric, and I was derided by many readers for doing so. Yet since then, the stock has lost 25% of its value.

 

The moral of the story? In a world warped by money printing, be careful that you don't get sucked in by the seductiveness of the stock market.

 

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

 

74Comments
Jan 26, 2013 3:40AM
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It's really amazing watching how the stockmarket is totally out of touch with the global reality.

Artificial Intelligence???

Jan 26, 2013 3:26AM
Jan 26, 2013 1:36AM
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filthy rich hoard all the money as they get richer everyday sucking the life out of the middle class and everyone gets poorer hoarding money results in no circulation then all suffer even the idiots that screw us
Jan 25, 2013 11:02PM
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It seems that governments are racing against each other to devalue their currencies, mostly by printing money.  When inflation hits, something else will hit the fan.  And bonds will be crushed.
Jan 25, 2013 10:47PM
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Everything is fixed to the advantage of those in power. And seduction is a mere investment.
Jan 25, 2013 10:02PM
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The Fed is suppose to protect the people from Bank manipulation. So why have they developed the " Three Monkey Policy "

Hear No Evil         See No Evil         Speak No Evil

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Bill,

Thanks for the reality check.  It's not me; it really is them (the Fed)!! 

Jan 25, 2013 5:32PM
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Bought the junior gold miners today.  Bought 100 shares @ 18.075.  The miners have to rebound sometime.  I'll just wait and buy more and collect the dividend.

I am still 60 percent in cash.  Waiting for the Dow to drop below 10K before I get serious about putting my money to work in the stock market.

The job picture is just going to get real nasty with healthcare being the big question mark.  More company's are just going to hire part time employees so they won't have to pay more for healthcare.
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ABOUT BILL FLECKENSTEIN

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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