kaltbaum report on the fed
“OUR REMINDER OF THE FED INSANITY”
By Gary Kaltbaum-June 20,2012
Whenever the Fed does their thing, we feel it necessary to remind you of our thoughts:
The Fed said this, that and the other thing today. Blah blah blah…buy more this, buy more that. Blah blah blah…economy slowing down. In seconds, markets tanked and within minutes, markets righted themselves as markets love more printing of money. Right? We are listening to pundits trying to decipher their words. We do not need to decipher. The Fed will continue to print money infinitum. There is no stopping this train. They will print and print and print until someone who understands the repercussions takes over. So do not listen to those that say the Fed will stop. No chance!
Let us be clear about our stance. There is nothing about the Fed we like. We think they are nothing more than interlopers in the markets. We think they are nothing more than manipulators of the markets. The fed cannot affect the economy. They have been trying for ages. We believe the Fed realizes this. There is something the fed can do…and that is affect the markets. They know that printing trillions of fantasy dollars does one thing…juice the markets…and juice they have.
Their thought process is that by manipulating markets higher, people will feel more wealthy. If they feel more wealthy, they are more apt to spend. If they spend more, maybe the economy picks up.
But there is always an ultimate outcome of these moves and it is never good. The outcome is the popping of the market bubble as bubbles create valuations that cannot last. Markets drop from shear overvaluation because of the Fed’s moves. Do we have to remind you of 1999? How about something closer in time…2008? These bubbles were outcomes of assinine Fed policy. We know there is enough blame to go around but we point the finger straight to one place…the Fed and Ben Bernanke. Before him, it was Alan Greenspan. The housing bubble could not have occurred without 0% interest rates and could not have occurred without the Fed taking their eyes off of the lenders…who by the way, is their job to regulate. This combination of easy money and lax oversight did the trick. This is all evidenced by Alan Greenspan with the following genius words:
“Innovation has brought about a multitude of new products, such as sub-prime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in sub-prime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”
Here is our bigger problem for down the road:
In the past, the Fed mistakenly kept rates too low for too long. BUT…we have never ever seen this type of insanity we are seeing right now. We have seen in the past what low rates can foster…but we have never seen the combination of low rates combined with the printing of trillions of dollars to buy our own debt in order to…hmmm! In order to what? We still have not figured it out yet. Let us repeat the word: TRILLIONS! We are not talking BILLIONS! We are talking TRILLIONS! Not only do these moves make stock valuations go higher…but to us, the bigger bubble is in the bond market. The Fed bought over 60% of U.S. bond issuance last year. On top of that, the Fed has destroyed savers and has forced them into doing things they ordinarily would not…and that is to buy into very risky and leveraged bond funds in place of getting 0% on their savings.
Hopefully, we will be wrong but like asbestos, no one knew how bad it was until everyone became very sick from it. Did we just compare the Fed to asbestos?
Markets can and will react well to the creating of trillions…but it is the ultimate outcomes we worry about. Again, hopefully we will be wrong.