commentary (which we also made a “special report”) was essentially a response
to a financial reporter who asked us why we were so negative on the stock
market in 2016 just because the Fed, more than likely, was going to raise
rates. He stated that the stock market
almost always rose during the previous rate increases. We explained the difference between the Fed
tightening now, with enormous headwinds to overcome, relative to the times when
the Fed raised rates in the past. We
went on to also explain why the same headwinds to the Fed tightening would
probably also cause a U.S. recession (and maybe even a global recession).
comment was written in late December just after the Fed had raised the Fed Funds
rate by 25 basis points. Before this
past commentary very few people were warning
about a recession, here or globally.
However, now we are reading a lot about criticism of the Fed, and
virtually everyone that appears on the financial networks seems to have a
strong opinion about the probability of a U.S. or global recession. We have
been critical of the Fed since the Greenspan days but seldom heard of anyone
else criticizing the Fed or complaining about the ineptitude of the Fed. Now, however, after the stock market declined
sharply in January, we seem to hear about these two areas of concern almost every
recent criticism was a Wall Street Journal op-ed article by Martin Feldstein
regarding the Fed on January 14th 2016. The title of the article was, “A Federal
Reserve Oblivious to its Effect on Financial Markets”. We were struck at how closely this article
mirrored everything we have been talking about for years. The synopsis of the article was in the second
paragraph, “The overpriced share values are a direct result of the Federal Reserve’s
quantitative easing (QE) policy. Beginning in November 2008 and running through
October 2014, the Fed combined massive bond purchases with a commitment to keep
short-term interest rates low as a way to hold down long-term interest rates.
Chairman Ben Bernanke explained on several occasions that the Fed’s actions
were intended to drive up asset prices, thereby increasing household wealth and
consumer spending.“ The Federal Open
Market Committee last month didn’t even mention the risk from persistent low
rates. You can well deduce from the
title of the article that Feldstein does not have much confidence in the Fed
and FOMC in extricating the U.S. from the mess the Fed has put us in over the
past 7 years.
Gross asked a sarcastic question of the central banks in his written piece for
his clients yesterday. He asked, “How’s
it Working for Ya?” central bankers. He
then went on to criticize virtually every country that has been under the thumb
of their central bank. We were happy to
see that Bill Gross is on the same page as us.
recently, Rand Paul also criticized the Fed and the entire way our governmental
system works. He stated that the U.S. spends
over $600 bn. on the military in this country which compares to the top 10
countries spending on their military (including Russia, China, and the other
top eight countries spending on the military).
The right wing governmental forces want to spend more than $1 tn. more
on the pentagon while the left wing wants to spend much more on the domestic
side of our economy. Both get their way,
and the taxpayers get stuck with the bill as we borrow $1 million a minute to
support this and other spending. As we
stated in our last comment, the total debt of the county exceeds $100 tn. if
you include unfunded liabilities and promised entitlements. This debt is enormous relative to our $18 tn.
economy. These numbers are the main
reason our economy is growing so anemically.
heard a radio interview with economist Lacy Hunt, whose point of view we very
much agree with. The common theme here keeps
coming back to what the Fed has done to the financial markets by essentially controlling
the price of money rather than have the free market determine it. It has forced savers to chase return, which
cannot be done without increased risk.
And investors are not the only ones farther out on the risk curve than
ever before. We see announcements almost
every day about companies buying back their own stock, often with borrowed
money. As Mr. Hunt pointed out in his
interview, corporations are making financial investments in their own stock at
very inflated levels instead of making capital investments in their businesses. This phenomenon
does not bode well for future economic growth or for future stock market
We have been talking about the Fed and
government deficit spending over the past 15 years. The Fed cannot expect to
control the price of money and not have the economy and markets suffer adverse
consequences. Continuing the rate
increases risks further weakening of an already weak economy recovering at the
slowest rate in history from the last recession. While a cessation or reversal of the rate
rise has, on its own, potential to cause a panic as the markets realize that
the economy is weak and not likely to recover before there is a bursting of
what we and others have termed the “Central Bank Bubble”.