The Fed's market farce

Tepid economic growth, political turmoil, budget cuts, stalled earnings growth, yet stocks are pushing to new highs? It's all about the Fed.

By Anthony Mirhaydari Feb 28, 2013 3:35PM

The market farce has reached new heights this week -- with the Dow Jones Industrial Average ($INDU) zooming to new post-recession highs -- as concerns surrounding the Italian election and the growing risks of the Federal Reserve's extreme monetary policy stimulus were salved by congressional testimony by Fed Chairman Ben Bernanke.

 

Bernanke told Congress he saw no reason to stop QE3/QE4 because the benefits are clear and the risks low (we know different, however). A better explanation is that the Federal Reserve's meddling has messed up the normal relationships between the business cycle and interest rates, and he is becoming increasingly desperate to justify his downright reckless efforts.

 

So while, on the surface, things appear to be just peachy, Wall Street insiders are beginning to worry as evidence builds they're already moving toward the exits.

 

The truth is, there are deep structural problems with the economy that cannot be solved by more cheap money. Wall Street knows this. Washington knows this. And above all, Bernanke knows this.

 

Federal Reserve Building copyright Hisham Ibrahim CorbisBut he can't admit that. And he feels he can't stop flooding the financial system with cheap cash until higher inflation -- via energy and food prices -- forces him to. Thus, despite rising skepticism and nervousness amongst other Fed policymakers, Bernanke remains steadfast in his commitment that an open-ended commitment to pump $85 billion into the economy each month is a good idea.

 

His logic became so twisted that, in response to a question from California Representative Miller concerning the impact QE3/QE4 has had on mortgage rates (not much) and whether it was time to pull the plug, he deployed circular logic.

 

Bernanke replied, oddly, that the best way to get interest rates up is to have low interest rates.


In essence, he is saying that by holding rates low, economic growth will follow and interest rates will rise.

 

 

Of course, despite six-years of 0% interest rates and five distinct balance sheet stimulus efforts, 10-year Treasury yields are trading below their financial crisis low of 2.1% -- moving below 1.9% earlier this week. And this is despite the economy has been growing since 2009 and has already moved beyond its 2007 pre-recession high.

 

So while monetary policy had to a role to play back in late 2008 and early 2009, it's done all it can do. The Fed is just risking another asset bubble and other unknowable risks from its unprecedentedly aggressive actions.

 

Why continue? Washington is paralyzed by the fear of what would happen if A) we fall into a new recession with unemployment already near 8%; B) the stock market, one of the only bright spots of the current recovery, turns lower and drags down household wealth with it; and C) interest rates start pushing higher, forcing Democrats and Republicans to find a solution to the debt/deficit problem as the cost to finance our $16.6 trillion national debt explodes.

 

 

The Fed, for now, maintains direct control of C as it essentially monetizes the national deficit. It's losing control of B as insiders dump shares to excitable retail investors, who are focused on the Dow's rise to new highs while broader measures, such as the Russell 2000 and measures of NYSE breadth turn lower. And it's already lost A, with much of the rich world already falling into a new recession.

 

Back to B. The major indices are diverging in a big way, with the Dow closing at a new high but the S&P 500, the Nasdaq 100, and the Russell 2000 all at least 0.5% below their one-year highs. The last two times this happened was on May 1 and October 5. In both cases, the Dow topped immediately and lost more than -5% in the month that followed.

 

What would be the catalysts for a resumption of the downtrend?

 

We have a heavy economic release schedule over the next week, including a spate of manufacturing activity reports, more data out of Europe, and next Friday's payroll report. We have the budget sequester that will kick in on Friday, starting what will surely be tense budget negotiations in Washington throughout March. And we've yet to hear the end of the Italian political situation, nor how Spain and France intend to meet Eurozone deficit targets in the midst of economic stalling.

 

What would cause me to reverse direction and turn positive?

 

Better breadth, volume, and stronger participation by cyclical sectors. Over the last few weeks, as the Dow has zoomed to new highs, it's been led by consumer staples while basic material stocks have lagged. Until steelmakers outperform toilet paper makers again, I'll remain skeptical.

 

And finally, we would need to see stronger economic data.

 

With all the headwinds we face over the next few months -- Eurozone turmoil, Chinese monetary tightening, American political blood sport and fiscal austerity, and the consequences of higher energy prices -- an improvement isn't likely. Not with sentiment already so high.
So for now, I remain defensively positioned and continue to recommend positions like the Direxion 3x Treasury Bull (TMF).

 

Disclosure: Anthony has recommended TMF to his clients.

 

Be sure to check out Anthony's 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.

 

123Comments
Feb 28, 2013 4:01PM
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I see a federal reserve in full panic mode. They are now doing everything possible (and have been for years) to save their failed economic model. Their fully inflated blowfish, blimp sized, super egos will never, never, never allow them to admit they are wrong about anything. When it is revealed that they have destroyed everything, they will all probably go down like Hitler in some bunker or be found hiding in a hole like Saddam Hussein.

Feb 28, 2013 3:53PM
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Precisely;

 

If the market is doing so well, where is the prosperity?

If you are not concerned about our future then you are not paying attention.

Feb 28, 2013 4:01PM
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Bernanke is trying to beat out Greenspan for the prize as the most clueless Fed Chairman
Feb 28, 2013 4:10PM
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Wow, Anthony! How did you come to all these conclusions?? Did you talk to Cramer? Or did you start reading these message boards to get a hint? Most people know what's going on with the Fed - and we see them for the corrupt clowns that they are. Ron Paul may be loony when it comes to foreign policy, but he was spot-on when he said get rid of the Fed!
Feb 28, 2013 4:19PM
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2 for 2 today Anthony!

 

Have no fear everyone, if the economy goes south, and it will, Obama will just have another political grandstanding tour across the United States blaming the Republicans for the mess.

 

"They wouldn't let me increase taxes so I could spend more..."

Feb 28, 2013 4:28PM
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Bernanke is doing everything he can trying to hold the water from coming out of the Dam..but it not going to work.

 

You can't keep printing money to buy US debt...this Country is Broke!  It's broken Financially, Socially and Morally!

 

 It's just a matter of time until the curtain is lifted so everyone can see how bad things really are..these corrupt politicians should have just let things crash back in 2007 and let the banks go bankrupt.. At least our currency would have survived.

Feb 28, 2013 4:22PM
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If things are going so great how come I was just told that for the first time in 24 years that I'll have to wait a few days for my paycheck?
Feb 28, 2013 4:50PM
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Being an older person, I love what those low interest rates have done for my CD's.
Feb 28, 2013 4:42PM
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Bernanke is the biggest con artist in the history of this great country ! He should be sharing a jail cell in federal prison with Madoff ! We the clueless American People allow this farce to continue ?
Feb 28, 2013 4:35PM
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Romney said he would have canned Bernanke.  Owebama said he backed Bernanke.  I wonder who's whacked-out economic plan this idiot is following?
Feb 28, 2013 4:44PM
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Shut down the government, it won´t be missed. Especially the Fed, Bernanke must be impeached.
Feb 28, 2013 5:04PM
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The key of his A,B and C is the part under C where he mentions the congress having trouble paying for the debt when rates rise. A number of things could cause it but rates will certainly rise back to "normal". 30 year average being just under 5%, Clinton was paying about 4.75%.

 

Debt under BO will certainly hit 20 trillion in a few years. Put our interest at 5% and the current "crisis" will be like fighting over pennies. How does a trillion a year in debt interest payments alone hit you? It's not that many years off boys and girls, hold onto your hats when it gets here.

Feb 28, 2013 4:18PM
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I am on the same page with you on this Tony.  What now scares the confidence out of me however is the politics of this whole thing.  I know you aren't as vocal as I am about the One World Economy thing but I see no other goal.  It seems clear as can be to me.  And if you are a believer that this is the unspoken corporate goal then it only follows that in order to pull this transformation off equities markets must be maintained and secure.  From an investor perspective falsely maintaining the "wealth" until it is no longer necessary is totally frightening. I was raised on the premise share price was calculated on anticipated forward earnings.  With all the political obscurity and influence going on we can just about toss that out the window.  I think the question we should all get together and ask is this.  "What in reality is todays determinant of equity share value"?  Any ideas? 
Feb 28, 2013 4:16PM
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The whole senario is totally mind boggling.

Monday the Italian's (do it better) elect Cheech and Chong and the world markets have a mini-meltdown. Now the politically eloquent word " Sequestration " and circumstances leading up to the deadline have been well known since the fiscal cliff was kicked down the road by Boehner ( Laurel)

and his partner Obama ( Hardy). And Benanke ( Hear No Evil / See No Evil/ Speak No Evil) just completely side steps the latest fiasco and say " Oh we will just through more money at it., That will fix it" . Jamie Dimon says " The Banks have more money than they know what to do with it. "

And the market keeps running like the energizer bunny, just keeps going and going.

When the European's hit the wall , they can admit to it. and try working it out. But they own up to the fact. In North America the problems are all fiction aren't they? This is just a continuation of " Oscar Night" and word " Austerity Measures " is just the name of a movie, got to be fiction.

I can't believe Laurel an Hardy were accually elected, oh ya another movie!

Feb 28, 2013 5:27PM
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I think you need to look at history.  Soros is calling the shots.  He shorted the British Pound, and so damn near broke England.   Then recently he has been shorting the Japanese Yen, just made a billion on that play.  So Oblama has been setting this up for Soros.  Oblama is a puppet who is intentionally setting this country up for a total collapse.  If the rally was for real, we would have volumn, and like unemployment the formula keeps changing.  Why do you think unemployment which is 23 %, false data has helped drive this.  Recently the situation with Bob Woodard shows that the Oblama Administration has been spoiled by the Socialist who are journalist.  I feel sorry for the people who think Oblama is God, because he sure as hell thinks he is.  Benghazi and the Journalist cover it up.  Impeachable offense, and next try to take the weapons, when he is arming idiots in HLS and IRS.  Letting people out of prison because he is a insecure person.  Won't help any of you.  Country is being flushed down the tubes as you watch.  Anyone can keep printing money for votes
Feb 28, 2013 5:02PM
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First, here’s a food snapshot for you. Yesterday I bought a box of Nabisco Nilla Wafers; it cost $4.11 for a single 11oz box. That translates into $47.36 per gallon, if gasoline or milk were $47.36 per gallon would buy it? That’s just one example. Food is going through the roof. No more Nillas for a while.

 

Second, on the housing issue, we had a robust housing market in 2002-2008 and look what that got us. So when I hear that Mr. Bernanke is obsessed with restoring the housing market I see the same mistake being repeated again. People are once again buying more house than they can afford on shaky jobs and dubious income.

 

Finally, I do applaud Mr. Mirhaydari for getting serious and calling Mr. Bernanke and the Fed brethren out on these disastrous decisions. Unfortunately the pain of this disaster is already starting to burn and Mr. Mirhaydari is right, all at the Fed simply will not acknowledge what is happening in every sector of our economy, from Automobiles, to Houses to Nilla Wafers.

Feb 28, 2013 4:40PM
Feb 28, 2013 5:24PM
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"But he can't admit that."

 

No one on Wall Street or the Fed ever admits to wrong doing. They just pay a fine. In the Fed’s case, they’ll just print the money for that too when the time comes.

Feb 28, 2013 5:22PM
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Canadian  investors are saying "Get the H** out of the U.S. Market.

http://youtu.be/5zD7xR0DGuE

YouTube search:
Get far away from USA...its collapse will be messy: Jeff Berwick


Feb 28, 2013 5:48PM
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When you try to intervene you prolong the pain and do not fix teh problems.  If we were to let things hit hard all would know that the damage was done and then we would build from there.  But when you prolong the pain and damage by attempting to prop things up no one knows when we have hit bottom and everyone holds back.  This is true of the Fed's actions and government stimulus.  At it gets worse.  What we see is the federal government claiming to be trying to prop things up and thus borrowing borrowing borrowing, all the while telling us and themselves that "we have no choice".  Of course we do have a choice, but sadly the result of all of this is 5 or 10 times more debt than we would ahve otherwise added and that results in PERMANT ECONOMIC DAMAGE!
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