Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Fed Bubble Making Machine Is Cranking Up!

Stock-Markets / Stock Markets 2010 Nov 05, 2010 - 03:37 PM GMT

By: Sy_Harding

Stock-Markets

Best Financial Markets Analysis ArticleThe Federal Reserve has cranked up the bubble-machine again, pumping up opportunities as well as risk.
In doing so it is on the wrong side of the economic cycle again, as it so often has been in the past, beginning to ease too late to prevent recessions, and then continuing to ease too long after recoveries are underway, creating bubbles.


For example, in 1998, although having already warned of the inflationary risk in the overheated economy and “irrational exuberance” in the stock market, the Greenspan Fed panicked when Asian markets began to collapse. It cut interest rates to hold the U.S. stock market up, producing another round of irrational exuberance, and boosting the stock market up into the 1999 bubble. The Fed did not reverse and begin tightening monetary policy until June, 1999, and by then it was too late. The bubble was formed and burst with dire consequences in early 2000.

Then, apparently not realizing the stock market collapse was an advance warning of a coming recession, the Fed continued raising interest rates until May, 2000, and did not begin cutting interest rates to prevent a recession until January, 2001. By then, the 2001 recession was already upon us.

To help pull the economy out of the 2001 recession the Fed then cut rates a total of 13 times, not stopping until June, 2003, well after the economy was recovering and the 2002-2007 bull market was well underway.

And that failure to get ahead of the curve resulted in the real estate bubble. When it burst, the resulting recession of 2007-2009 was the worst since the Great Depression, and the 2007-2009 bear market was the worst since the 1930’s.

This time around it seems the Fed had it right last spring when it ended its first round of quantitative easing in March, earlier than scheduled. It said low interest rates would be needed “for an extended period”, but it was time to begin removing the other massive stimulus efforts of 2008 and 2009. The recession had ended in June last year and the economic recovery was underway.

It stuck with that outlook until August, projecting that economic growth would slow for a couple of quarters but not into recession, and then begin to grow again in the last half of the year and through next year.

But in August, when the stock market was down and economic reports from the summer months were worsening (as the Fed had supposedly expected) it panicked, reversed its bias and promised a second round of quantitative easing “if needed.”

When the economic numbers began improving three or four weeks ago, I was sure the Fed would decide the “if needed” conditions had not arrived yet (and might not), and would either postpone the decision on QE2, or announce a very watered-down token program. I wrote a column three weeks ago titled Is The Fed Sorry It Even Mentioned QE2?

But no, at its FOMC meeting this week the Fed remained in panic mode and announced an aggressive program in which it will pour roughly $100 billion a month of additional liquidity into the financial system until next June.

I believe part of the Fed’s problem is allowing itself to be influenced by the complaints from Main Street and Washington regarding the high level of unemployment, and that the economic recovery is not creating jobs fast enough. The Fed singled out the continuing high unemployment as a major reason more easing is needed.

But surely the Fed knows that employment is a lagging indicator, and using it as a leading indicator for its policies is almost sure to have it on the wrong side of the cycle. Employers don’t begin hiring more workers to any degree until the economy has already recovered significantly enough that they can no longer keep up with increasing business by giving current workers more hours, and hiring part-time help.

The Fed has apparently ignored recent jumps in the ISM Mfg Index, ISM Non-Mfg Index (service sector), retail sales, durable goods orders, and the like, which indicated even the point in the recovery may be near where the employment situation improves.

That seemed to also be indicated on Friday by the Labor Department’s latest monthly employment report. It was that 151,000 new jobs were created in October, the highest number since May, more than double the forecasts of 70,000 that economists expected. And the previously reported numbers for August and September were revised to show 103,000 more jobs were created over those two months than previously reported.

The evidence that the Fed is again behind the curve could hardly be clearer.

So at this point, the additional liquidity the Fed has decided to pump into the financial system will surely go toward continuing the Fed’s history of creating bubbles.

Picking the location of those bubbles will probably be very profitable over the next year or two. The initial betting is that they’ll be in commodities and emerging markets, and that bond prices will tumble. Other possibilities will also emerge. It’s bubble-detecting time!

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in