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.
A 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.
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
One should really ask what was going on with the government during the housing boom. What about all the various governmental entities like the SEC, the politicians, Wall Street, the financial gurus and brainy economists?
During these booms, markets take on a mob mentality where the only focus is making money and driving prices higher - not on wondering why or the nature of the boom. One only needs to examine the roaring 20s, the tech boom of 2000, Long Term Capital Management melt down, and of course the housing bubble. There have been many other. One can go way back in history and explore for example the Dutch Tulip Bulb boom.
What one should consider today is where the economy and market are at today? For instance, is the current market rally a continuation of a secular bull market that began in 2007/2008 or a cyclical bull market inside of a secular bear market?
You could compare this run up to Apple's. Apples's was a clear sign of irrational exuberance, and the stock's price has fallen back to more reasonable levels. Similarly are the indexes going through the same exercise or is the market forecasting bigger and better things ahead in the coming months or years?
I for one am moving my money into more conservative investments that have track records of stable or growing revenues and earnings.
Everybody should stop work and the FED keep printing money and send to everybody at home.
So people can keep buying what they can not afford.
Living one life that does not belong to then.
Like that everything going to be fine the way the FED .............!
Kudo's to the folks who braved the markets and have cashed in. Were just old greedy seniors (per Alan Simpson) gutless wonders who have watched the last of our laddered CD's dry up and the bulk of our retirement income dry up. Market scares us to death since the idea of losing the last of what we have saved over a lifetime vanish if we enter the game now "Wallsteet". We played by the rules during our working years accepting a smaller return each year because we took little or no risk but the FED changed the rules and we are being screwed into the ground as the FED manipulates and micro manages the economy. So I guess we will spend down our lifetime of savings until we are broke and just end up on the dole. With CD's and bonds spread out with a 3-6% return we were able to meet our retirement needs.......I guess a few years from now we will be able to join the 47%.
Unless your looking at CD`s ?you have to love the fed.We`re making a to of
money in this market.Happy days are here !
"Playing the FED is like playing golf. It's a puzzle without an answer. I've played both games for 40 years and I still haven't the slightest idea how to play." pp G. Player
It seems to me I remember Mr Bernarke came up with the idea of subprime loans and opened the flood gates for any and everyone to purchase the American Dream, a home. It was a frenzy and all the higher ups saw the money advantage, it was party time and they KNEW what was going to happen. I like alot of other people were in the euorphoric of the times, I remember so many people could not wait to get a loan, the loan officers were handing loans out like candy, don't worry about your falsified documents that we helped you fill out (frickin crooks). The real estate bust was designed from our government by them and for them. How many people got wealthy from the subprime fiasco? Some body do a study and then take the money they made and give it back to the people that were duped.
And our President was telling the home owners that they were at fault, are you kidding me? He hasn't kept his house under control since he has ben elected, TWICE., when our leaders act irresponsible so will the people, truly they believe they are above the law and can do no wrong!!
Study the Depository Trust Company (the worlds largest corporation) if you really want to learn something about the stock market. They are the true OWNERS of stock in the USA. You are just a benificiary of that stock you "bought". Now remember a OWNER can change the benificiary of something, a benificiary can NOT change the owner. So when s**t hits the fan what do you think will happen to that stock?
Then for another "eye opener" look into who OWNS the Depository Trust Company.
Scary world we live in.....open your eyes......stop being a sheeple.
The author seems amazed the Fed did not understand the impact of the mortgage crisis. Now why do you think it was, as he said that, "the geniuses in charge of our monetary policy were completely unaware that the housing buble had been the economy, among other issues"?
Simple. They are all bankers from TBTF banks. Their perspective and their loyalties were planted in those fields and grew from these roots and the results were harvested as a tragedy to the American people.
They believed the economy consists of the market and the TBTF banks' welfare. They still seem to believe that. In terms of understanding the real economy in which the people of this country live and work, they are selfish fools.
And who is supposed to protect the people and the people's money from manipulated markets? The same markets that manipulate the stock market? The same markets that take their people's bailout money and put it into hypotecated accounts? The same markets that manipulate the price of gold and silver, regardless of how much printed, and virtural, and fake money there is out there? Not the criminal, shyster politicians and TBTF and TBTJ banksters.
You know what? I don't know a thing. There I have said it. But the ringing noise, left in my ears from the crash of my phony and manipulated pension plan is still there, telling me that nothing has changed. The game remains the same.
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ABOUT BILL FLECKENSTEIN
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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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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