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Fed in Denial on Existence of Asset Bubbles

Stock-Markets / Liquidity Bubble Nov 27, 2009 - 07:07 AM GMT

By: Mike_Larson

Stock-Markets

Best Financial Markets Analysis ArticleEver see one of those “See no evil, hear no evil, speak no evil” statues or pictures? The ones with the three monkeys, one covering his eyes, one covering his ears, and one covering his mouth?

That’s pretty much what the Federal Reserve appears to be doing now when it comes to the asset markets …


redcheck Stocks up 67 percent from their lows? No worries.

redcheck Junk bonds up 52 percent this year — the biggest increase in the history of the high-yield debt market, even as default rates are hitting their highest levels since the Great Depression? That’s cool, too.

The Fed seems to be ignoring what’s going on in the asset markets.
The Fed seems to be ignoring what’s going on in the asset markets.

redcheck Gold at all-time highs of over $1,170 an ounce? Fine with us.

redcheck Crude at $80 and climbing? Agriculture commodities ramping? Surging prices for sugar … cotton … wheat … platinum … silver … copper … aluminum … lead … ZINC? Pu-shaw! Nothing to worry about.

Is it just me or are we apparently ready for round THREE of idiotic asset speculation fueled by too much easy money? Sure looks like it …

Deny, Deny, Deny

You think I’m exaggerating the Fed’s blissful state of ignorance here? Don’t take my word for it. Take THEIRS!

In just the past several days, Fed speakers have practically been tripping all over themselves to deny the existence of any asset bubbles.

First up was Fed Chairman Ben Bernanke in New York. He said:

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” … but “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

Next in line was Fed Vice-Chairman Donald Kohn in Illinois. He said:

“The prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates.”

Then there was San Francisco Fed President Janet Yellen. She basically waved off the idea of raising rates to combat surging asset prices, saying in Hong Kong that:

“Further research into the connections among monetary policy, the banking and financial sectors, and systemic risk is needed to help answer this question.”

That’s bureaucrat-speak for “We’re going to kick the can down the road.”

Fed President Bullard said we could expect two more years of easy money.
Fed President Bullard said we could expect two more years of easy money.

But St. Louis Fed President James Bullard trumped them all. In a speech in his hometown, he essentially pledged that the Fed would keep rates unchanged through 2012. His comments:

“If you look at the last two recessions, in each case the FOMC waited two and a half to three years before we started our tightening campaign … If we took that as a benchmark, that would put us in the first half of 2012.”

Yes Virginia, there is a Santa Claus. And he lives in Washington, DC! He’s going to give you more than two years of abundant liquidity and cheap money. Go ahead and party and speculate like mad because the cops aren’t going to shut things down anytime soon.

What Does this Mean For Investors Like You?

Well, in my trading services, I have been aggressively long various ETFs and options despite technical indicators that don’t look incredibly bullish. My subscribers are sitting on a couple rounds of triple-digit gains, and in my view, more are coming down the pike.

Why the success?

Investors who stick around too long will get creamed.
Investors who stick around too long will get creamed.

Because I’m keeping it simple. This is an environment where any and all assets are levitating on a sea of easy Fed money. We had the tech stock bubble. We had the housing bubble. Now we have an “everything” bubble — courtesy of the “See nothing, hear nothing, speak nothing” crowd at the Fed.

I say ride it while it lasts. Make as much money as you can. But keep an eye on the exit door, take profits along the way, and use trading tools like trailing stop losses.

Because I will guarantee you right here and now that this Fed-fueled insanity will end in yet another epic blow up. And investors who overstay their welcome are going to get creamed … again.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .


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