The Fed Fails to Create the Stability it Dreams Of

Japan earthquake will shake the world economy, Oil prices an irritant to Wall Street rather than a lubricant, Fed wont spur growth, just inflation, a flat bottom for the economy or a while, lack of job creation and debt control, Sound economic growth hasn’t existed for 11 years and it is worse now than ever, PIMCO eliminates government debt from portfolio. Soros weighs in on public spending cuts in US, saying they will only hurt economic growth.

March 12 2011

Wall Street at least temporarily relieved of the burden of having to buy Treasuries & Agency bonds, is looking at the jump in oil prices as nothing more than an irritant to their plans for a higher market. Bill Dudley of the NY Fed, a most powerful member, continues to make a vigorous defense of Federal Reserve policies. He, and a few other Fed participants, and Chairman Bernanke believe liquidity is the key for solving problems. That is not only in the realm of debt purchases, but in the relief it brings to Wall Street and banking. It relieves them of the responsibility of having to make those purchases to assist the Fed. Those funds can then be directed toward other investments, such as la liquidity-driven stock market rally. The correlation between the movements in the Fed balance sheet and market can be traced to 85% of market movement for the past 2-1/2 years. An interesting result of Fed manipulative policy is low level of short interest during this period. Most of the professional market players knew the market was headed higher, because they knew such overwhelming liquidity injections would have to take it higher. They also knew that the Fed had to keep the wealth affect going, because the market was the only generator of wealth left, as the bond market bubble would be broken eventually. The Fed has engineered a market recovery and Wall Street knew what they were up too. QE1 saved the financial community and QE2 saved the government debt structure at least temporarily. The wealth effect has been saved temporarily as well. The public has been left with a pile of crumbs as they struggle for survival. Unemployment has improved ever so slightly and now we have a new problem to increase the suffering and that is much higher oil prices.

The largess sponsored by the privately owned Federal Reserve has still not been enough to spur adequate growth and the effects of Fed monetary creation and deficit spending have not been enough to produce higher economic growth and now the economy has to deal with rampant inflation, the result of QE1 and QE2, plus stimulus, of what will turn out to be a subsidy of some $5 trillion, plus rocketing oil prices. It then is not surprising that we are seeing downward revisions of analysts in 3rd and 4th quarter growth estimates. We still are seeing declines in home prices and sales, as well as in orders and shipments. All this cannot help but negatively affect consumer spending. At the same time the states and municipalities are severely cutting back.

The inventory overhang, higher interest rates and lack of funds for down payments have again trapped the housing market. As we predicted long ago, before anyone else, that the downside in housing has at least two years to go, and perhaps four years, before a bottom is found. Then how long will it bump along the bottom? Perhaps eight years or 20 years, or more. Even new homes are facing lower appraisals.


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