The Fed's Faulty Easing Policy Is Pumping Up Assets

Doug Kass TheStreet.com October 7, 2010

This blog post originally appeared on RealMoney Silver on Oct. 6 at 7:31 a.m. EDT.

-- Executive Vice President Federal Reserve Bank of New York Brian Sack (bold type mine, for emphasis) On Monday, Oct., Brian Sack, Executive Vice President of the New York Fed spoke at the 2010 CFA Institute Fixed Income Management Conference, in Newport Beach, California. The subject of his speech was managing the Fed's balance sheet. Here is his presentation in its entirety. The speech is a must-read, specifically as it relates to his statement that Fed balance sheet policy "adds to household wealth by keeping asset prices higher than they otherwise would be." Yes, he really did say that! The above quote from Sack speaks volumes and underscores the concerns that I expressed earlier this week. Despite a market elated, I contend that QE 2 is a one-time event that only creates the appearance of wealth (read Sack's quote at the beginning of today's opening missive) but will not considerably move the needle and will ultimately prove to be a poor allocation of resources with possible adverse consequences. "As long as the music is playing, you've got to get up and dance.... We're still dancing." -- Chuck Prince, Former CEO of Citigroup For now, the markets violently disagree with me as investors continue to dance to the tune of quantitative easing and its intended inflation of asset prices. But we have seen this party before, back in July 2007, when Citigroup's (C) Chuck Prince told the Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market. This is starting to feel like deja vu all over again. We are in a fragile economic recovery characterized by excess industrial capacity and by a surplus of labor. If we were in a sound and non-jeopardized economy, the Fed would not be having a QE 2 discussion nor would the administration be seeking extreme fiscal solutions. In my view, we are in a contained recession and containment efforts will continue with QE 2, but the efficacy of the past efforts to stimulate now appear to be waning and the new contemplated strategy of emptying the monetary spigots has an uncertain outcome. The enthusiasm associated with the Fed's commitment does not preclude a continued fourth-quarter 2010 stock market rally, but the state of our contained recession and the uncertain outcome of QE 2 are likely to limit the scope of any rally. "We got on 'American Bandstand,' where kids would dance to a record and then rate it. We called ourselves Tom and Jerry. I was Jerry." -- Paul Simon From my perch, as the kids used to say on "American Bandstand" when they rated a record, I give QE 2 a 75 -- it's easy to sing along with but hard to dance to. Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here. Add Comment Tweet At the time of publication, Kass and/or his funds were long Citigroup, although holdings can change at any time. Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. 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