6 years of free money?
As the Federal Reserve's zero-interest-rate policy continues, doubts begin to grow.
In late 2008, something happened that many thought was impossible: Borrowed money became essentially free. It was then that Federal Reserve started its zero-interest rate policy, slashing short-term borrowing costs to near 0% in an effort to stem the financial panic and recession.
Of course, they didn't stop there. In the years that followed, the Fed piled on with four "quantitative easing" efforts focused on pushing down long-term rates as well.
The results: Adjusting for inflation, the big banks and the government can now borrow money at negative interest rates. That's better than free. And that's because the monetary base has swelled from around $800 billion in 2008 to nearly $3 trillion now.
The benefits of all this are questionable.
The unemployment rate is stalled near 8%. Employment-to-population ratio has fallen to early 1980s levels. Middle-class wages are still flat-lining. And, as hawkish members of the Fed are starting to point out, the downside risks are growing fast -- causing Wall Street to question its "free money 4'eva" mindset. Here's why.
The quiet enthusiasm was shattered on Thursday after the December Federal Reserve meeting minutes were released and, to the bulls' great surprise, suggested that a growing number of Fed policymakers are beginning to doubt the efficacy of repeated doses of quantitative easing and an extended period of ZIRP.
The minutes said that a "number of participants" on the Fed committee expressed concern the $85 billion-a-month open-ended money printing stimulus under QE3 (mortgage purchases) and QE4 (Treasury purchases) -- and the resultant expansion of the Fed's balance sheet as the monetary base swells like a cancer -- could result in higher inflation expectations and gum up future policy implementation.
Concern was also noted about the fact the Fed's zero-interest rate policy, now entering its sixth calendar year (shown above), could lead to "imprudent risk-taking" and "financial imbalances."
More simply, as the Bank for International Settlements noted in its recent quarterly report, the Fed and other central banks could be blowing up a third asset price bubble of the last 12 years -- this time, in corporate bonds.
All of this suggests the market's cheap money addition may not be a sure a thing as many believed.
The result was a dramatic pullback in stocks and precious metals during the cash session, with the selling accelerating afterhours in gold and silver. While the price action looks weak, the technicals in the precious metals are already oversold.
So for now, I recommend avoiding gold and silver. But I also wouldn't recommend short positions either. The takeaway is that, as we move closer to the debt ceiling fight over the next few weeks and what's set to be a disappointing Q4 earnings season, an increasingly reluctant Fed is just another catalyst to work against the market's newfound enthusiasm.
Indeed, today Richmond Fed President Jeffrey Lacker said that current Fed policies will "test the limits of credibility" and that additional monetary stimulus would not boost growth.
I'm going to use the complacency and false enthusiasm that has settled on Wall Street to add leveraged exposure to the CBOE Volatility Index ($VIX), which has been crushed on a historic scale over the last few days, by adding the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended TVIX to his clients.
I found this positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Credit default swaps, easy mortgages, dilluted currency, derivatives at a much higher level than pre collapse, bail outs, a status seeking collection of law makers, daily declarations of,WE ARE HEADED IN THE RIGHT DIRECTION, fixation on the fantasy unemployment rate, I could go on but I just ask each of you to do some teaching to the electorate that renewed this direction by explaining credit default swaps and derivatives to them so they can vote more intelligently in future elections.
The U. S. govt is a monetary addict getting an unlimited unfunded free ride. The BILL will come.
Wall Street also.
The people on the Federal Reserve who were concerned about money printing will probably be gone in a year. This is just the Fed borrowing the playbook from Mario Draghi, who jawbones to the way he wants the market to react, yet nothing comes of what he says.
There's an easy way to tell when the Federal Reserve (and politicians) are lying. Hint: It's when their lips are moving.
If Tony baloney is saying lay off gold...I'm buying.
Wasn't Tony saying only yesterday the market had peaked, and today he says the market has newfound enthusiasm?? Which it is,Tony?
awwww look at this! it appears that the obamafication of the nation has just begun,(well actually continuing from 2008) the democrapic voters just took a look at their paychecks and are upset that the they're smaller!!! wow! that was quicker than I thought!!!
oh I'm sorry did you idiot low-information aka idiot voters finally get the picture? that "everybody's" taxes are going up, and you thought only the mega rich will be taxed to death, aka "punished" by your grand high exalted mystic marxist ruler and colossal mega-fraud obama, well I just have one thing to say:
hahahah!!! ah! hahahahahaha!!!! oh I'm doing cartwheels here in my house and typing at the same time I'm so giddy!! like I told you idiots, the mid class is getting hammered by new taxes not just the rich, the people makin' 30K and up are going to get the worst of it, not the rich and that's what's so funny!!! or ironic depending on where you are hehe
and for you idiots that voted for that black bastard again, hahahaha!!! hahahaha!!! oh the thousands of dollars you could've had for yourself are now going to pay off God knows what pork, or some scumbag corrupt union bosses, once again: hahahah!!!! ah!!! ahahahahahahahahahahaha!!! oops!! just orgasmed from all this excitement, excuse me while I change my pants, when I bust, I really make a mess, pardon me....
How many of us who KNEW the Federal Easing Program would be bad lost their jobs over it? Don't you think it's time we investigated and went after the Kool Aid addicts who bought into it and are now wealthy off a bad program?
Close the banks. End the Federal Reserve. Get RID of Wall Street.
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Do it once a year. This allows the best-performing asset classes to take off and run.
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