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Source link: http://archive.mises.org/4938/were-fed-guessers-not-investors/

We’re Fed Guessers not investors

April 21, 2006 by

Here’s a question for you. What’s funnier: we buffoons who make up the cast of investors, brokers, kibitzers, commentators who produce the daily theatrical Sitcom called the US stock market, or Saturday Nite Live? I vote for us, if comedy is valued over drama.

Like this past Tuesday. Ms. Janet Yellen, San Franciso Fed Chairman, implied with a wink and a nudge in the ribs and 15 cautiously chosen words that maybe she and her pals might quit raising the Fed funds rate. (Well, maybe one more little bump.) But the fed push-ups have never had the slightest impact on long term rates. – some would add inflation. The rate game reminds me of the mythical sparrow who comes once a year to the rock of Gibralter to sharpen his little beak. How long will it take him to wear away the rock? Furthermore these multiple short term rate increases have put immense riches – via higher returns on CDs, money market funds, even savings accounts – into the pockets of short term investors. And not a single pundit can explain how that fights inflation. Transfer dollars from banks to consumers? Sure, there’s an incentive to save but Bastiat would predict booming shoe sales and lots of work for glaziers, eventually. Isn’t that called upward pressure on prices?

The Frenchman’s old adage re the “Seen and Unseen” takes on a weird new meaning. What’s seen is what the headline writers yell in your face – what is unseen is what’s unreported. Inflation, due to the Fed’s lecturing has bannered the front pages over the past 3 to 4 decades. It is the one word benchmark of our economic health. (Remember when they were in love with money supply, which they couldn’t measure?)

Even stranger, those leaden long term rates which had never jiggled in the face of multiple short term rate bumps – those immobile rates, declined upon Ms. Yellen’s pronunciamento! As though the Fed’s previous action was a historical factor in their feeble, pseudo-invisible, undetectable movement.

And not too many nanoseconds after she spoke, the equities market roared like a victorious lion and bounded to a new level. Why’s that? The IRS did NOT abolish the corporate income tax, Exxon did NOT reveal that mere mouse droppings would propel the car of the future, and Osama Bin Laden did NOT announce his conversion to Presbyterianism. Well I guess if the Fed believes that inflation is under control (witness the cessation of its rate game) investors follow, shouting buy orders.

Was inflation ever a threat? Who knows. Did it prowl the marketplace like Dracula? Did Fed rate manipulation put a stake in its heart or will the vampire take a short coffin nap, then revive and bite us in the neck tomorrow? Stay in touch, ignore the headlines and pass up SNL for the business news. It’s funnier.

{ 8 comments }

Casey Khan April 21, 2006 at 2:41 pm

I can’t stand financial headlines. One day there will be a headline saying stocks up on earnings optimism. The very next day you’ll see the same publication say, stocks down on earnings pessimism.

Michael Ellis April 21, 2006 at 11:47 pm

Good article. So who would have thought the flakes in San Francisco would be bucking uncle Fed when it comes to raising interest rates. But then this is the same San Francisco that bucks every other convention that we have in this country so why should I be surprised?

Tom Schofield April 22, 2006 at 8:53 am

Exactly when did the discount rate replace the price of crude oil as the market’s over-riding concern? It seems not too long ago that when the price of crude went up the market went down. Today, crude – and gasoline – prices have spiked and the markets are on a tear. What did I miss?

Tom Schofield April 22, 2006 at 8:54 am

Exactly when did the discount rate replace the price of crude oil as the market’s over-riding concern? It seems not too long ago that when the price of crude went up the market went down. Today, crude – and gasoline – prices have spiked and the markets are on a tear. What did I miss?

M E Hoffer April 22, 2006 at 9:19 am

Tom,

Think “petro-dollar”: Higher Oil prices increase the demand for U$D.
The Fed is truly limited in its ability to “raise” interest rates in the face of the amount of leverage being employed in our Enonomy.
This also accounts for the 1/4 point stairstepping of the FFR–so as to not upset the applecart gyroscoped by financial models that are ill-prepared for fat-tailed anomolies.
The impact differential between the effects of higher Oil prices and dollar repudiation/systemic seize-up is obvious.

Hope this helps….

公�法 April 24, 2006 at 6:09 am

This also accounts for the 1/4 point stairstepping of the FFR–so as to not upset the applecart gyroscoped by financial models that are ill-prepared for fat-tailed anomolies.

billwald April 24, 2006 at 10:28 am

50 years ago people would invest in well run company that sold a good product at a fair price. These days the big money goes to high fliers that have never sold a product at any price. Now days it is 100% Las Vagas style gambling with tax benefits to losing.

ted roberts April 25, 2006 at 8:41 am

The lesson here seems to be that there are trends and manias in market ananlysis just as there are in womens’ clothing. Today, (and I believe we’re at the end of an epoch) it’s fed push-ups. Tomorrow it’ll be assets (as it was when inflation was rampant – “forget the balance sheet – look at their airplanes and real estate”. ) Tomorrow, the price of crude may take precedence – which is semi-rational. And some day earnings, debt, management, product demand may be overweaning.

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