The world was taken by surprise recently by the Federal Reserve Board's announcement that it would publish some of its economic forecasting that forms the basis for its short-term interest rate strategy. The Fed claims that the move will vastly increase so-called transparency, which has become a buzz word for honesty and virtue. However, the new policies do nothing to remove the cloak of secrecy that conceals still many of its most significant activities. This myth of new transparency will do little to lure investors back into the markets but as an unintended consequence will reveal just how profoundly the markets are currently guided from the top.
The Fed plays the markets like a football game, and Ben Bernanke is currently calling all the plays. Although investors are mere lineman in this struggle, there are things we can do to stay in the game. When tackling a ball carrier in football (or in the rugby played in my home country) it is best to ignore the movement's of your opponent's eyes or hands which can be used to obscure his true intentions. Instead, good coaches tell us to fixate on the runner's feet as the best indicator of his actual path down the field. Likewise, when looking at any political body, like the Fed, it is best to look at their actions and ignore their words.
Bernanke offers endless words about the Fed's willingness to keep the economy on track. In reality it appears as if he only wants to do one thing: keep asset bubbles from collapsing by continually debasing the currency and looting the savings of thrifty Americans. Any other policy intentions should be considered misdirection.
The Fed was the enabler of the most massive asset and debt boom in history. Now, the unraveling of this profligacy threatens abject poverty for billions of people. Therefore, it is little wonder the Fed is unpopular and is seeking to retrieve its image. What is the reality of offering public access to Fed forecasts? Is it genuine transparency or is it done to add further weight to negative interest rates as a means of forcing consumers to spend rather than save?
In the past, the Fed has proved far from accurate in its economic forecasting. Indeed, former Fed Chairman Greenspan utterly failed to see the collapse of housing, banking and stock markets, all of which had been accurately forecasted by many others. Prudent investors are wary of Fed economic forecasts and give them guarded weight.
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Furthermore, there is a distinct danger that investors may fail to appreciate the political forces which drive the Fed sometimes to act contrary to its economic forecasts. For example, while acknowledging privately that the economy can not be jump started, the Fed nevertheless presses Americans to spend when they should be saving and to hold depreciating paper dollars when they should be storing their wealth in precious metals.
It is widely known that the Fed uses its policy tools and public proclamations in order to influence the U.S. Treasury market. It is far less understood how its moves are equally directed at the stock market. From my perspective, it appears that the Fed have unstated policy directives to keep the Dow Jones index above 10,000. At the same time it seems it has striven mightily to keep the price of gold from rising too fast. The markets are not free, but the Fed talks as if they were.
The Fed's negative interest rate policy forces yield-starved investors into the equity market. Not content with offering negative real interest rates as a means of forcing people to accept greater risks against their better judgment, it appears that the Fed intends now to use its economic forecasts as added inducement. It is hard to see this as a legitimate activity for a central bank, least of all the world's most powerful.
Prudent investors are becoming wary. Already, many have lost faith in home ownership as a store of wealth and prefer to rent. Evidence indicates a growing distrust of equity markets as a source of capital enhancement. If inflation becomes undeniably virulent, as some forecast it will be later this or next year, the Fed's carefully constructed models will be completely discredited. Investors' holdings of U.S. Treasuries or U.S. stocks, who had been convinced of the Fed's forecasts, stand to be crushed.
Precious metals offer one way out. However, the Government, the Fed and mainline media do all in their power to distort and discredit such investments.
John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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