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.
I think anyone who is elected should have to live off their money not ours. As far as the banks and how they handle our money, they should have to work for minimum wage and have to take out loans at the same rate regular people have to.
CEO's there should be a limit on how much they get paid and no more. If these companies that have multi million dollars to spend then put it where it can do the most good, not welfare but people who want to work and need to get a small loan to get on their feet. the banks are not people friendly unless you make millions.
Anthony....you have a bad memory, or perhaps you were too young to remember when Alan Greenspan's tight monetary policy got us into this mess. The U.S. was already heading down into a recession several years back and Alan Greenspan of the Federal Reserve raised interest rates which in large part shut our economy down.....remember? I didn't think you would remember Mirhaydari - you were probably growing up in India.
You cannot create jobs or prosperity by PRINTING money, no matter what the idiot Bernache and imbecile Obama tell you. 85 billion a month is about $1000/household in the USA. Did you get your share?
Neither can you Borrow and Spend your way out of debt...
And raising taxes on anyone, DESTROYS demand. Raising taxes, is like slamming on the economic brakes. The imbecile Obama must have cut economics class that day to attend a Marxist rally.
We are trying all 4 at once, and wonder why we are entering the 5th year of democrat economic Malaise? Buy gold/silver, guns/ammo, and prepare for economic disaster... it's coming...
Avoid silver and gold like the plague. Not every country in the world nearly went bankrupt trying to police the world for BIG OIL and the GOP. America is a fire sale right now and demand for our products will increase dramatically from emerging markets. Even an old short-seller like Tony Mirhaydari can't deny you can't short a market that is heading straight up from zero. This BULL MARKET is going to steam roll all the way through 2016. Spending will be cut slowly, not overnight as Romney wanted to do. OMG, can you imagine how far back in time and reputation we would be if that fanatic was President? We don't need any more porn stars or carpenters from Utah so the federal government needs to roll in there quick and start separating church from state, especially in the schools, before Romney gets back from his banking vacation in the Cayman Islands. BULL MARKET 2013 !!!
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The loan is a sweet deal for Eddie Lampert. The company needs the money to get through the holidays.
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