The Federal Reserve Picks the Winners and They Ain’t You

A bipolar prediction came across my desk:

“If the market rises over the next several weeks, today will have been a good day to buy.”

No one can know the future today.

But the nonsense doesn’t stop there.

While on the East Coast recently, I was listening to an AM radio finance show. An older man called in to ask how he could buy into various commodity markets. He was worried that they had run too far already. The female host assured him that there was plenty of time and to jump into the market. The caller mentioned that he liked to buy low and was waiting for a pullback. The host told him to start preparing for hyperinflation. She named an African country to enhance her theory and leaned the conversation toward food insurance, needed of course for the coming descent into anarchy.

Not knowing what you are talking about is not new. President Herbert Hoover circa May 1930:

“While the crash only took place six months ago, I am convinced we have now passed through the worst, and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”

Can’t just pick on old-timers. Consider the current day. Lloyd Blankfein (of Goldman Sachs) said his firm would have survived the credit crisis without government help. The firm’s president, Gary Cohn, was more definitive:

“I think we would not have failed. We had cash.”

Then Treasury Secretary Timothy Geithner countered:

“None of them would have survived without government help.”

More contradicting rhetoric from a 60 Minutes interview reinforces the propaganda:

Scott Pelley: Is keeping inflation in check less of a priority for the Federal Reserve now?

Ben Bernanke: No, absolutely not. What were trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

That confidence is misplaced when you consider Bernanke’s words from 2005:

“We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think its going to drive the economy too far from its full employment path, though.”

In 2006 Bernanke stated:

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007 Bernanke stated:

“At this juncture…the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

Worse yet? Bernanke told the Senate Banking Committee in March 2011 that he saw little evidence that the stock market was a bubble, but provided certainty with this ditty of a response: “Of course, nobody can know for sure.” Why again do we care what this man says? But before Bernanke, Alan Greenspan was also laying the groundwork.

From Federal Open Market Committee documents comes former Atlanta Federal Reserve President Jack Guynn:

“Nearly every major city in Florida has experienced increases in the double-digit range, and some, like Miami, Palm Beach, Sarasota, and West Palm, have been reporting increases in housing prices on a year- over-year basis of between 25 and 30 percent. I’m reasonably comfortable characterizing the housing feeding frenzy in some of our markets as being a bubble or a near bubble. The ugly picture we have seen before, and that they think we may very likely see again before long goes something like this: The drying up of sales of new units; the painful decision of developers to go ahead and complete the construction of additional units to make them saleable, further depressing the market; and speculators who had hoped to see big capital gains walking away or defaulting on their contracts, giving their properties back to the lender. Perhaps it’s because of where I sit, but I am less comforted than some of my colleagues about the housing situation.”

Greenspan responded:

“Lets take a break for coffee.”

Six years later Alan Greenspan declared:

“I conclude that the current government activism is hampering what should be a broad-based robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.”

Wasn’t Greenspan the chief architect for the wealth effects in stocks and real estate?

The media are right there too on the con.

During production my documentary film arranged for an interview with CNBC’s Maria Bartiromo. Bartiromo canceled minutes before her interview. She left a voicemail message:

“I probably should not have said yes to it without having this stuff go through my, uhhh, PR people. I’m sorry about that, but, ah, given whats gone on and all the criticism of analysts and the, you know, the Dot-com boom and bust I…I can’t, um, I…I don’t want to really do this open ended without really knowing more details.”

Almost eight years after the Dot-com bubble, Bartiromo was using it as a reason to not go on the record about the role media plays on Wall Street. That voicemail confirmed my experiences at CNBC earlier in the year. When they walk off the set, it is just that, a set. One reader was not happy with my revelations:

“You make accusations without any proof or examples. You are media and just as guilty as those you accuse. This is a hatchet piece without merit. You apparently have an audience that hates America, CNBC, and Maria. Glad I don’t have to live in your asshole.”

It all comes down to propaganda and the battle against it.

Anyone familiar with the inner workings of a Tupperware party knows all about the power of influence, and how very well it works (source: Robert B. Cialdini). Most info-Web-media-news-paper types don’t believe that great trend trading knowledge and wisdom are found by removing junk from peoples heads (source: Nassim Nicholas Taleb).

Removing junk is just as much a part of my calling as explaining the concepts and rules of systematic trend following trading.

The Author