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.

 

79Comments
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

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 26, 2013 9:06AM
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I was one who missed the lagging indicators in early 2008.  I had to know something was up, but business seemed good and everything was doing OK.  When I finally seen the problem was July-Aug. 2008.  But it was too late for me, I had already committed to business investments that would eventually cost me lots of money in the following year.  I won't make that mistake again....I see the present stock rises and all the money pouring in it then just shake my head.  As I've written before, I distinctly remember a photo of Ben Bernanke and Henry Paulson standing in a parking lot talking in the mid fall of 2008.  They both looked as if a ghost had appeared....they knew all hell had broke loose and had no idea how to contain it.  Unfortunately our country decided to embrace socialist directions in late 2008 which will only now make the end of musical chairs a catastrophy.  The history of societies printing money should be a good teacher.....we have bad students in control. 
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 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 26, 2013 8:43AM
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bernanke is one, john kerry is another, anybody endorsing the pres is another...all brain washed
Jan 26, 2013 11:21AM
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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.

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.
Jan 26, 2013 9:53AM
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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.

Jan 26, 2013 8:05AM
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So much for that hope and change thing.  Just another day in Obamaville.
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Bill,

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

Jan 26, 2013 12:15PM
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Look at what Greenspan admitted in an interview a few years back (on the CNBC Housing Bubble special)  - that his "couple of 100 Ph D's" (including Bernanke) "couldn't figure out how derivative instruments actually worked" . Yet Greenspan just let it ride, and chose not to sound the alarm

The massive easy-money fueled housing bubble was quite apparent to any reasonably intelligent objective person by 2003 - yet the Fed says they didn't see it.

The Fed is now on a one way street, Bernanke will have no way to ever unwind this thing - THIS is the debt monetization many of us predicted 30 years back.
Jan 26, 2013 8:39AM
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are there fewer shysters in the financial world today than there were five or ten years ago ?  i doubt it because figures don't lie but liars figure...this is an axiom that applies to all walks of life including politics right on up to the highest levels...the president says he is happy to discuss ways to mitigate the growing federal budget deficit problem, but his track record belies this...what you do speaks so loudly i can't hear what you say...there are too many seemingly smart people in this world today who have allowed themselves to be brain washed...shameful, shameful
Jan 26, 2013 11:46AM
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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.

Jan 26, 2013 3:26AM
Jan 26, 2013 12:00PM
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"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

Jan 26, 2013 11:34AM
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Now you see it, now you don't... abracadabra alacazam, alacabrodax scam scam scam.  Will the circus ever leave town?  Sometimes what you see is what you don't want to get.
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 26, 2013 5:25AM
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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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