The other day I had a Twitter debate with Mark Dow (don’t know him). My tweet:
Father Buffett Omaha says the Fed is history’s greatest hedge fund. You did not know your vote got you that? Relax.
The Fed has reduced the federal deficit by hundreds of billions. Plus, unlike a real hedge fund, no one can pull its funding.
He then went on to outline the benefits of Fed actions with zero mention of risks. He outlined more here with his key rationalizations for never ending activist Fed policy as follows:
They fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes.
Animal spirits? Sort of like 98-99 and 03-07 animal spirits that induced the current Fed actions that seem to rock your world? Love the academic sounding cover to disguise boom/bust bubble blowing engineered by the government (a government controlled by the very banks that benefit the most from Fed policy). He continues:
[W]hy…have equities gone up so much in response to QE? The simple answer? Psychology and misconception. By taking an aggressive stand, the Fed signaled to markets that “I’ve got this”. The confidence that the Fed would do everything it could to protect our economic downside stabilized animal spirits. Then it slowly but surely enabled risk taking to re-engage. The fact that so many people believe that the Fed would be “pumping money into the stock market” and so many buy into the aphorism “don’t fight the Fed” (notwithstanding September 2007 to March 2009) made the effect that much more powerful. In short, this largely psychological effect on markets—one that I (Mark) had initially underestimated—bought time for household balance sheets to heal and is allowing fundamentals to catch up somewhat with market prices.
These guys writing academic defenses of the Fed or criticizing what people may or may not know about the Fed–are dishonest actors. We have seen two major Fed induced bubbles in the last 14 years, and most likely we are in the middle of a third. Their rationalizations designed to promote cradle to grave daddy government can be tossed in favor of one simple heuristic: interest rate manipulation is no free lunch. There will be a cost.
Note: This dialogue is not trading advice. None of it matters if you are a trend follower. However, I am a citizen and despise dishonest weenies with crap agendas. Also, if one wants a fundamental counter to Mark, consider.