The Fed's Next Blunder Is Coming Our Way

Bill Fleckenstein MSN Money September 13, 2010

The signs are all there that the Federal Reserve is ready to step in with more policies and more money -- but without much more wisdom.

To state the obvious, the market action of late has been incredibly volatile and deceptive, even though there hasn't been that much trading volume and bouts of volatility have been interspersed with dull periods.

How the Fed works

However, the Aug. 30 session made it look like the previous Friday's rebound never had happened, with the market once again getting shelled. Then the following day, the market at times appeared about to fall further apart, but each time it stabilized, leaving me -- and, I assume, most everyone else -- confused as to what might happen next.

That question was resolved with a big blast higher Sept. 1. It seemed that having weathered those rough waters, stocks might hold together for a while. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=1ee81329-ca66-4596-9ec8-7009551aa38a,d07ec1dd-b839-4a05-9498-23d1a2529d53,cda2206b-0552-4be3-b2bb-954e144f056e,089ea7cc-71a4-4fec-88f8-a72af214be35,64a6117a-2b25-48f1-a11f-1a9ab4d1297b,706db013-b0ca-e7fc-ad0a-58c3e4b2b503,48e05ecc-dcf9-4bb4-ae81-bd29d2d0ecd0,555d63eb-bc47-49b7-b6e6-c9c4d799ee01,37faf0ad-1e85-8b2e-0aca-6a4c1a6b4ac1,977e678a-ad6a-41c8-ba3f-cb40dcfab20a", "player.fr": "iv2_en-us_money_article_16x9-Investing-ContrarianChronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=1ee81329-ca66-4596-9ec8-7009551aa38a,d07ec1dd-b839-4a05-9498-23d1a2529d53,cda2206b-0552-4be3-b2bb-954e144f056e,089ea7cc-71a4-4fec-88f8-a72af214be35,64a6117a-2b25-48f1-a11f-1a9ab4d1297b,706db013-b0ca-e7fc-ad0a-58c3e4b2b503,48e05ecc-dcf9-4bb4-ae81-bd29d2d0ecd0,555d63eb-bc47-49b7-b6e6-c9c4d799ee01,37faf0ad-1e85-8b2e-0aca-6a4c1a6b4ac1,977e678a-ad6a-41c8-ba3f-cb40dcfab20a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');September does have a fairly well-established record as being a bad month for equity owners, though five of the past six have produced gains.

Part of the reason for the outsized move to start the month may have been the lopsided bearishness at the end of August (e.g., that week's reading from Investors Intelligence showed the lowest number of bulls among investment newsletter editors since March 2009, not to mention being one of the lowest totals of the past 20 years).

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That doesn't mean stocks have to rally, but it does indicate a lot of people have already prepared for lower prices, making the crash that many seem to expect less likely (a point I have made a number of times).

Of course, the reason for economic weakness, high unemployment and poor performance of the stock market is the real-estate/credit bubble, brought to us primarily by a reckless and incompetent Federal Reserve. A chairman in denial As if to remind us of central bankers' inability to "get it," Sept. 2 saw Federal Reserve Chairman Ben Bernanke testify before the Financial Crisis Inquiry Commission. He continues to be in denial regarding the Fed's role in the bubble, and he claimed that monetary policy was not the main cause of the housing/credit debacle, which is false.

In addition, he stuck to the party line about how tools such as interest-rate and money-supply adjustments are too blunt to be used against asset bubbles because of their "large side effects." In keeping with the talking points of the Fed's Alan Greenspan era, Bernanke seems to hold the view that, gee, if we raised rates we might do a little damage to more than just the asset markets, and we sure wouldn't want to do that.

Yeah, Ben, I think you're right. It's better to pursue a wide-open, reckless monetary policy, thereby nearly vaporizing the financial system while wiping out huge chunks of people's net worth (some of those people didn't know any better; others were just greedy). Not to mention the damage done to all the innocent people who lost jobs in the economic fallout that followed the collapse of the real-estate house of cards.

If you asked most people today, I am sure they would wish that the Fed hadn't been quite so worried about the potential "bluntness" of sensible policy, such as higher interest rates when speculation runs wild.

It is maddening to see the Fed cling to its belief that there can never be too much of a good thing when it comes to printing money. I am not shocked that Bernanke believes this, but the Fed is going to continue to be the engine of instability until it is taken off the we're-smart-guys-and-know-how-much-money-to-print standard and put on something like the gold standard, or a variation of that, whereby "brilliant" economists who become chairmen and Fed staffers can't play out their financial-engineering fantasies quite so easily.

Until that happens, gold itself offers protection from the Fed's policies.

Continued: When hawks cry More from MSN Money

Inflation, stagflation and you

Investors head for the bunker

The next bubble is in punditry

No inflation means no recovery

The cost of this time down: Stagflation

1 | 2 | next >

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.608696; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=138;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesInflation, stagflation and you 09/03/2010The next bubble is in punditry 08/27/2010Cost of this time down: Stagflation 08/20/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 5CommentsNewestOldestBestWorstControversialLost Dollar8 hours agoThe only suggestion I have that may work is for the Fed to keep Mortgage Rates low for another 2 years, but raise Deposit rates on Savings and CD's so people who want peace of mind and no risk would be happier. I know this is counter intuitive, but at least I might as well throw pasta against the wall and see if it sticks. 0 0ReportSpamWorking Monday17 hours agoThere is a hugh disconnect from the Fed printing press to the means of production........and eventual consumption. These times have weath creation on hold due to investors intimidated by the uncertainty created by government controls. Controls intended to do good and results are 'no movement' or sit on the sidelines......and the sidelines are getting more crowded everyday! 0 0ReportSpamb_cappSat 3:44 PM

Bernanke is doing a great job at 'kicking the can down the road.' And frankly ... the economy is not his problem ... when he appears in front of Congress he frequently tells Congress members that 'such and such problem' is actually the concern of another gov't agency ... he's only in charge of the U.S. banking system. Let other segments of government take care of today's economic woes ... like the legal system of America.

And here are three examples of how the legal system is solving the mess the Fed created.

For example ... three years after questions started flying in regards to Beazer Homes ( ticker BZH ) accounting ... the legal system finally has BZH's accounting chief appear in court ... but he'll probably get a $500 fine and BZH will 'recover' ... because the company as a whole shouldn't pay for one bad apple. For more google beazer homes accounting scandal.

Five years ago ... rumors started flying that Dell Computers had accounting problems. Every year or so since then the SEC opens a new lawsuit and Dell settles for a drop in the bucket. For more google Dell accounting settlement ... . Now that the SEC has taken care of that problem ... when is Dell going to pay his mortgage on a Four Season's Resort in Hawaii? For more read google Dell Hawaii hotel default.

And here's one more regarding a bank ... Citibank and ... Mike Mayo, a banking analyst who knows how accountants make money ... has discovered some flaws in Citi's accounting. For more google Mike Mayo Citibank accounting.

After the Tech bust in 2000 ... the economy should have been in shambles ... but when Greenspan gave 'free money' to everyone who is 'connected' to the banking system so they can 'keep the game going' ... the economy 'revived.' Now that the money is no longer free ... it is ... in fact ... WORTHLESS ... because the US gov't is WORTHLESS ... because the US gov't is no better than the regimes of the Soviet Union ... or the regime of King George II of Great Britain over two hundred years ago.

Why?

Governments that work for the people tend to survive and thrive. Governments that make the people work for them by doling out indulgences via gifts of interest free money to those who waste it because they have the proper status in today's society ... tend to disappear in the history books. And trust me ... the Bernanke Fed is completely content with wasting as much money as it takes so the current banking system remains intact and those in control of it ... STAY IN CONTROL.

I'll say it again ... there are solutions to the crude oil problem which is what the 'problem is' ... there are alternatives so the USA doesn't have to rely on Middle East imports ... but as long as XOM and F and GM and TOL and just about every other S&P 500 company that licks the hand of those in charge of the USA banking system/government ... the only change that is going to happen ... is a middle class that becomes extinct ... and more misery for the masses ... all the while, the rich keep on counting more and more of their gold coins stuffed in a Swiss bank vault ... and wait for housing costs to sink so they can make a fortune from being a 'landlard' ... ten years down the road ...

if the USA is still around.

As for the Swiss franc ... every day the people take money out of Euro bank accounts ... and exchange their currency for the Swiss franc. Check out CHF/EUR to get an idea of how soon the Eurozone is going to go bust ... at about the same time the USA and Japan sink as well ... because all three currency units have some serious debt problems and 'oil import' problems that are going to expose the debt problems sitting on a central bank balance sheet.

3 0ReportSpamstocker xSat 9:34 AMRegardless of what OB and Bernake do....they will not force people to create the demand enviorment needed for this low economy. It is true they are burning the savers though look closely at what is occurring .....zero to no return on safe assets yet savings rates continues to increase. This must drive them crazy.....bottomline their plan of forcing savers into the stock market or taking risk is failing......zero returns yet you save your assets......they just dont get it...too many colapses have burned investors and rewarded banksters..it will just go on....generation lost...thanks FED..try another plan.....maybe rewarding savers for a change??? 11 1ReportSpamLynn XSat 8:01 AMThe Fed will eventually kill of millions of older retired people with their low interest no income for you, old saver's policy. 10 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. 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