Fed admits they are largely responsible for inflated asset/commodity prices.

Discussion in 'Politics' started by Max E., Jul 12, 2012.

  1. Max E.

    Max E.

    I wonder what our resident Obama supporters who think Obama was responsible for turning the stock market around will make of this....

    I would love for one of our Keynesian experts to explain to me why a doubling of asset and commodity prices, and the endless pursuit of inflation which is exactly what the fed has set out to do, has not created any jobs, and has not made life any better for anyone but the rich.....

    The fed succeded in exactly what it intended to do, yet there is no increase in jobs.....

    A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

    NYSE Traders

    Theoretically, the S&P 500 [.SPX 1334.76 -6.69 (-0.5%) ] would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed.

    Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.

    What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes.

    For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices.

    The FOMC has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span.

    Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300.


    “I would conclude that correctly analyzing Fed moves is much more important than stock picking,” said Brian Kelly of Shelter Harbor Capital. “If you want to generate alpha, you should trade the stock market 24 hours before an FOMC meeting. Simply follow the trend for that 24 hours and you will outperform.”

    The chart shows the effect to be significantly pronounced in the aftermath of the tech bubble when Greenspan re-inflated stock and housing prices by slashing rates. It widens even further in the period since the financial crisis of 2008 as the market became beholden to the Fed’s use of its balance sheet to add liquidity to the market.

    “Blame Greenspan for this S&P 500 effect… it’s his free put,” said Robert Savage, chief executive of research site Track.com and formerly managing director of FX Macro Sales at Goldman Sachs. “Since 1994, the battle of central banks hasn't been to fight inflation, but rather to smooth out the business cycle and credit. The convergence of global rates and inflation left the decisions of the FOMC as the key variable for S&P 500.”

    That 'Fiscal Cliff' You're Worried About? It's Already Here
    The market is down six days in a row currently on the concern that the Federal Reserve will not embark on its third round of so-called quantitative easing anytime soon. Minutes from the central bank’s last meeting, released Wednesday, reinforced the concern that the economy is muddling along enough to keep the Fed on the sidelines.

    To be sure, one cannot look at these Fed actions in a vacuum and conclude the S&P 500 would plummet 50 percent if the Fed were to undue all of its supportive measures of the last two decades. But that doesn’t mean this exercise can’t be instructive.

    For example, proponents of index funds will often argue their case by using data that shows a significant drop in S&P 500’s yearly returns if you took out the five best days of that particular year. The point: you need to always be fully invested so you don’t miss one of those days, which account for the majority of the market’s annual return.

    The Fed’s next announcement is due August 1st and it would seem by this study, one would want to make sure they are invested in the market by 2pm on July 31st,

    “It's a QE world,” said Josh Brown, an investment advisor and popular author of The Reformed Broker blog. “We're all just trading in it.”

  2. Ricter


    Is this supposed to be an anti-Keynesianism argument? It's not anti (or pro).
  3. Max E.

    Max E.

    Actually it is very Anti Keynesian, it shows that the Fed has achieved exactly the kind of asset/commodity inflation it has set out to achieve, exactly what krugman is calling for, yet job growth, and economic growth has not come along with it.

    Not sure how on earth you could make that out to be a neutral argument.....
  4. Ricter


    I think you better dig out those never used economic textbooks of yours and study Keyn... oh, that's right, you threw them away the second you saw his name.
  5. Max E.

    Max E.

    The fed got exactly what it set out to achieve, which is inflation, and yet the unemployment picture didnt get better, and the economy didnt get healthier....

    Since you wont trust me on this one, here it is straight from Krugmans mouth, on what bernanke should do..... Why is it that when Bernanke got exactly what he set out to achieve it hasnt worked?

    Nobel Prize-winning economist Paul Krugman suggested Federal Reserve policy makers led by Ben S. Bernanke are “reckless” for refusing to pursue higher inflation, which he said could lower U.S. unemployment.

    “The reckless thing is to allow mass unemployment to continue,” Krugman, a Princeton University professor, said on Bloomberg Television’s “Street Smart” yesterday. “We have had a massive failure of our political system that has come to accept that 8 percent unemployment is the new normal and there is nothing that can be done,” Krugman said. “We’re in a low- key version of the Great Depression.”

    Krugman, whom Bernanke hired at Princeton in 2000 when he was chairman of the economics department, has said the Fed should tolerate inflation of 3 percent to 4 percent to boost the economy and put Americans back to work. He was responding yesterday to Bernanke’s comments last week that pursuing such a policy would be “reckless.”
  6. Ricter


    Hmm, maybe there's more than one type of inflation??
  7. Max E.

    Max E.

    So thats the answer? You think that the fed can target inflation so that only the prices of the things they want will inflate?

    So what is it that the fed should be targeting for inflation?

    I assume you are going to say "Housing" so how do you propose the fed should attempt to inflate housing any better than having zero percent interest rates? What Would the krugman/keynesian solution be to create inflation only in housing, based on the powers the fed has.....
  8. Max E.

    Max E.

    <iframe width="420" height="315" src="http://www.youtube.com/embed/U1S9F3agsUA" frameborder="0" allowfullscreen></iframe>

    Here it is straight from the horses <s>mouth</s> ass.....Cheering on the new ability to simply create money out of thin air.......

    "There will be No danger of a serious rise in the cost of living"..... LOL.....
  9. Ricter


    That's what you're arguing, right?

    I'm not suggesting inflation in real estate, no. Imo what the Fed needs to do is let wage inflation (and its consequents) generated by other entities, like businesses, rise above 2% (for a time).
  10. Ricter


    And it's true. Despite the growth of the monetary base, consumer prices are stagnant.
    #10     Jul 12, 2012