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.
I thought I knew why the housing bubble burst, why the financial system went into the ditch, why people got laid off and can't get a comparable job and the Fed raises the minimum wage, why college tuition is so expensive and college graduates are in hock until they retire, why seniors are getting blamed for the Social Security shortfall and companies are lining up their excuses to avoid offering affordable Medical insurance.
I thought I knew all of these things and more. I was wrong. I am completely mystified.
When I read comments from the left and the right, from liberals and conservatives, from libertarians and independents, and these comments all start sounding the same, then I know something is DRASTICALLY wrong with this country. We are all slowly coming to the same conclusions, and are frustrated with our politicians. We scream at them and they simply look right through us, as though we are invisible. They say words to us they hope will quiet us. When their words fail to quiet us, they ignore what we say. They are not beholding to us, if they ever were. The lobbyists own our Congresspeople. Money has corroded any moral code that still clings to their pysches.
We need to VOTE AGAINST ALL INCUMBENTS. Get them out of office. Get a majority of turnover in Congress, with every new election. Vote them out again, and again, until they start getting the message...to do OUR will, not corporate will. Keep turning over the seats in Congress to prevent these people from retiring in office, on our nickel. Keep getting freshmen senators and representatives into office, yes, and vote them out again come next election. Prevent them from becoming corrupted by the system and the temptation of TOO MUCH money to turn down. (If I really had MY way, I would make Congressional lobbying a class 1 Felony). Cooler heads will tell me to be reasonable, that voting out incumbents will do no good. I'm through with "reasonable". Nothing that has happened up to now has done ANY good at all. LET US DO THIS, FROM THIS DAY FORWARD.
this will all end very badly..what mr flekenstein however cannot tell you is when it will end
the fed says that it will continue to buy longer term securities until the unemployement rate
reaches 6.5%..that could take a decade or it could happen by 2015 but in any event as long
as they print money and keep interest rates down the equity markets will go up..and like everything
else when the herd decides to jump in the pool its time to jump out..let me tell you a little story
at the top of the housing bubble i woke up one night at 2am and said to my wife.we are selling
our home and then renting in the area...she asked me why and i said very simply that "everyone
cannot be a multimillionaire based on the value of their homes" the proceeds were put in 5%
cd's for between 4-7 years..my broker thought i was nuts and that I should be in the stock market
the rest is history...but my larger point is this..the little guy is just coming back to the market after
misssing out on the double since the bottom...that money will take another year to be invested but
fund managers will have to buy just about everything....forget what they tell you about asset allocation....those of you who have substantial liquid assets do not put more than 20% of your
investments in the market and then not all in equitites short term bond funds as well...then
wait..if the market crashes you will be able to pick up high dividend stocks at a bargain..if interest rates rise as they eventually have to you will once again get 4-5% safe insured CD rates...if
you have 2-3 million that will be between 80-150 a year plus ss if you are retired...live under
your means ..go out to dinner, play golf, and take vacations...but do not count on the market
to make you the 8% of the old days because it aint going to happen in your life time
What most people don't realize is that rates a lot of times rates track 2 to 3% above inflation. The Fed is holding it artificially low paying under 2% for our money now, which is stupid low. Figure BO will easily hit 20 Trillion in debt shortly. Now get out your calculators and plug in normal rates, say 4.5-ish like Clinton had. What you will find is that when that happens we will be paying over a TRILLION a year in JUST INTEREST EXPENSE. We will be taking in probably 2.5 to 2.8 Trillion.
Now put yourself in bondholder shoes, what rate would you want for a country spending all its cash on interest and entitlements.
The only thing it will take to kick off this event is inflation. Once it hits the FED can't keep printing. Are you willing to bet all this massive money printing and massive borrowing won't cause it? In the short term it won't, but at some point ......
I have been 100% invested for 20 years and am usually not overly pessimistic. Until now. Am i the only one that sees this as a very real possibility? It seems obvious as the nose on my face to me, am i wrong?
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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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Our own funding crisis could very well be precipitated by trouble elsewhere. And there are signs that Japan's bond market may be rejecting the nation's monetary policy.
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