Everyday when I switch my TV channel to Bloomberg or CNBC, I cannot stop watching a whole industry of *speculators* speculating if the Fed is going to cut, raise, or hold. I cannot stop listening to them either on the radio. Or reading about them on the Internet. Or from you guys!
Whatever trading/investing decision you are making, the Fed shouldn't matter. Warren Buffet will never ever even attempt to speculate on this whenever you see him on TV. Until you can understand that, you will not be able to enjoy bigger successes in financial markets.
I would like to set the record straight here about the Fed: the Fed *follows* the markets, not vice versa -- this is a point I have *repeatedly* cited many times responding to comments left on this blog. Now, let me explain:
- This is the comment I made back in September 2007, in which I cited Alan Greenspan wanting the US to return to the Gold Standard. It is only under the Gold Standard that a country can stop printing money *irresponsibly*. Greenspan knew exactly the consequence of excessive money printing, and that consequence is INFLATION. However, being a Fed chairman he didn't have a choice. He had to follow what the markets were asking for, and the Fed will deliver *religiously* and *consistently* whatever the bond traders were asking for. The bond markets are, afterall, much larger than the stock markets.
- This is what Alan Greenspan said in an interview on CNBC:
- This is a graph I constructed based on the Fed Funds rates published by the Fed and the 13-week Treasury Bill rates published by the Treasury. As you can see very clearly, the Fed *religiously* and *consistently* trails the 13-week Treasury Bill rates, not leads.
- Finally, this is what I like the best -- Jim Rogers, one of my heroes alongside Warren Buffett, James Simons, and George Soros. This is what he said back in September 2007:
You might find it funny whenever Jim Rogers is asking Bernanke to abolish the Fed and resign. Is not. Rogers is right, and that's really the right thing for Bernanke to do. The more money the Fed is printing, the more Inflation you and I will have to suffer. According to the M3 statistics that I have seen, well, the shadow statistics since the official ones are no longer published by the Fed in order to conceal just how much money they have printed, the total amount of US Dollar will double the total amount it was just few years ago! This is no rocket science: the more paper money you print, the less the money is going to retain its value and, hence, the plunge in the US Dollar and skyrocketing commodity prices which are priced in Dollar.
Now, stop being a Fed watcher! Stop asking why Crude Oil is so high when there's a recession. Every recession is unique. Some previous ones were associated with falling prices but this one, I personally believe, will go down in history as an Inflationary one, if not Deflationary.
I hope this post will put an end to the Fed watching behaviour here. Do your homework, and be a responsible investor/trader to yourself. Only do it when you knew you can win.
Best wishes
Boon
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4 comments:
boon,
good post. i am an avid follower of Jim Roger's vid :)I like his recommendation and his reasonings.
Boonie, lol, agreed... below was my trashing of Bernanke a few days ago:
Tuesday, March 11, 2008
What's Bernanke Smoking?
Comments:
a) US$160bn not enough, now US$200bn. Why is Bernanke doing this? It appears he is beholden to the big banks, when his real priority is a ensuring growth with minimal inflation. If it was Paul Volcker, he would have asked the banks to f.o.
b) It also appears that Bernanke is very keen NOT to let the stock indices fall further. When did that became the Fed's priority? Does the entire Federal Reserve board have a lot of stocks? Even if they do, its not their business to save the stock players.
c) If the motive is to save ailing banks and mortgage businesses from folding - is it really in the interest of a well run economy NOT to allow them to fail? This is reminiscent of Japan's credit implosion in early 90s, where nothing moved, nobody called on each other's debts. Till today, the economy is still working off the excesses, more than 15 years of stupidity.
d) When there are bubble, the market will self-correct, and they need to correct. The Fed should step in to facilitate an orderly correction, not manipulate or delay or stave off the needed correction. Not allowing things to correct will ensure problem credit still being pervasive within the system, and actually pumping liquidity will ensure the bubble is being reflated and will rear its ugly head again soon.
e) Its also ethically wrong not to punish the banks who made the mistakes, or rather allow the banks to be punished by the markets. Banks lend aggressively and recklessly, and they pocket the fees and trading profits. Due to the recklessness the markets imploded, now they come running to the Fed to rescue them from the mess. Where is the logic and sensibility? This also presents an unfair treatment of investment pros who shorted or betted that the credit implosion would come about - they deserve their gains for being right, what kind of casino is this - red the banks win, black the banks don't really lose??!!
Hi Boon, nice article. Although I have to disagree with you on this one in particular the graph.
Although the impression is given that Fed Funds rates follows T-bill rates, it is actually the other way around. T-bills ADJUST to expectations of changes in the Fed Funds rate, and not Fed Funds rates adjust to changes in T-bill rates.
The Fed though, is doing a really bad job and is abusing the Fed Funds rates bush-cowboy style.
Many thanks for the comments!
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