6 years of free money?

As the Federal Reserve's zero-interest-rate policy continues, doubts begin to grow.

By Anthony Mirhaydari Jan 4, 2013 3:03PM

Money copyright John Lund, Blend Images, JupiterimagesIn 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 anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.   

Jan 4, 2013 9:00PM
China will say no one day and suddenly the u.s. will be greece. As the bible says, never be a debtor.
Jan 4, 2013 8:53PM
yep! i will continue to buy gold, silver, and utilitiy stocks on pull backs as i have been for the last 5 years waiting for the giant bubbles to burst like the bonds and student loan defaults not to say high inflation.
Jan 4, 2013 8:24PM

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.


Jan 4, 2013 8:11PM

The U. S. govt is a monetary addict getting an unlimited unfunded free ride. The BILL will come.

Wall Street also.

Jan 4, 2013 7:58PM
One of the things I learned from the market crash in 2000, was not to listen to all of these "Gurus", and use common sense in your investing. Now I am in a position to be able to jump on opportunities, no matter what kind of crap is thrown at me, from whomever. I wish all of you the wisdom to see through the hype/crap.
Jan 4, 2013 7:58PM
Disgusting how these banks get their money for free, and then turn around and screw the small savings account holders with .010% interest rate. 
Jan 4, 2013 7:19PM
You have to have money saved if you want to be prepared for emergencies. The banks pay you next to nothing. When you borrow the sky is the limit. The spread is unforgivable. In the meantime jobs give out no raises but expect more. The cost of everything goes up but the taxes we pay on everything also goes up. If things continue as they have for the last ten years expect a revolution.
Jan 4, 2013 7:10PM
The Fed has it reversed:  allow anyone to get a loan, but charge up the yin yang for that loan, In particular those with poor credit.  If they allowed the free market to work, savers wouldn't be punished.  (And BTW:  in the next year, rates will increase, and bond holders will be crucified.)
Jan 4, 2013 6:43PM
During the 2011 Debt Ceiling Limit debate, gold and silver skyrocketed, and they could again.

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.

Jan 4, 2013 6:33PM
High unemployment rates are the only thing keeping inflation from going through the roof.  Of course hyper-inflation may well be the gov's hidden agenda as a debased currency will effectively reduce the impact of massive debt. 
Jan 4, 2013 6:28PM
Politicians fear losing the money they get from banks when trying to get elected.As the economy improves we will have to buy back our own houses from the banks that caused all this mess in the first place.The wealth of Americans has been successfully transferred to the wealthy.Banks got a bailout and Americans got  eviction notices.
Until we address the money people owe on homes that have lost half of their value this country will continue to struggle.The equity that was built by american families was once used to send kids to college and start small businesses is now gone. 
Jan 4, 2013 6:27PM
What goes around comes around. The wheels on the bus go round and round, round and round....
Jan 4, 2013 6:23PM
This will come to haunt the tax payers!! Thanks Ben and Obama
Jan 4, 2013 6:14PM
I seems to me that the investment banks created seven trillion in money supply float without involving the government and factor in the velocity of that float in the economy as spent money and suddenly one has an economy that is missing about 10 to 12 trillion..  All the fed can do is push on a string or accept severe price implosion.  Do want your home value to return to 1974 levels?  Cause that is what can happen.
Jan 4, 2013 6:10PM

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?

Jan 4, 2013 6:05PM
There's something wrong with this article, it was Dec.16th 2008 when the fed rates hit 0.0 to .25%, just over 4 years ago, how can we be entering the sixth year of 0%, a little to much spin maybe. With the Congress blocking all job recovery bills our options are limited, the Republican controlled congress knows that by blocking all job recovery bills, they would force the federal reserve to keep the banks swimming in free cash. Yes, the same tag team that made trillions creating the housing bubble are making trillions during the stagnant recovery. Until America outlaws lobbyist, this cycle of corruption will continue, support the " Saving American Democracy Bill " by independent Bernie Sanders, break the cycle of misery.
Jan 4, 2013 5:40PM
Ron Paul was our only hope.  Don't worry about the banks, worry about the welfare state we've become.  With 47 % of the American people on some sort of Federal funding we have big problems
Jan 4, 2013 5:38PM

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....

It's called legal theft which only those "CONNECTED" can get away with. Not really complicated.
Jan 4, 2013 5:27PM

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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