Fed Revisited

by Larry Levin


Unrelated to the newsletter, but nevertheless a very funny clip sent by one of my best pupils (Andy L.), I think you'll get a kick out of it: Click Here to watch!

I ended yesterday's newsletter with "Google Wiemar Republic and Zimbabwe inflation rate. Then pray 'but it's different this time.'" This was an incomplete thought.

What I mean is; although I believe that there are odds of Wiemar-like hyperinflation some time in our future, I also believe those odds are quite remote. If the banks lend out too much money, both the banks and the Fed (where it came from) will be repaid in worthless dollars. It is not in their best interests.

What could lead us to this horrible destination, however, are the glittering-jewels-of-colossal-ignorance in the House of Representatives and Senate - otherwise known as The Clown Posse. If these idiots believe that they can spend any sum they choose without any consequence because the Fed will cover their backsides, in addition to the Fed's money printing, well, then the Wiemar/Zimbabwe-like future may occur. However, I again want to stress that I believe this scenario is slim at best.

What I do see as a real possibility is a Japanese-style economy that constantly goes into recession, then recovers, then falls back into recession, then recovers, then...you get the picture. Japan is still suffering this economic pattern for 20-YEARS now.

Bill Bonner writes a good piece on the Fed as well, and the full article can be found here...

http://dailyreckoning.com/more-debt-to-fight-the-correction-and-other-absurdities/

So, the Fed has made another mini-move. And the markets reacted appropriately, in a mini-way. Stocks went down a little – minus 54 on the Dow. Gold went down a bit too – off $4, to bring the price to $1,198.

Barron’s was not wrong. Just early. You’ll recall the newspaper says the Fed will “Print $2 trillion.” Yes, it probably will. But not now…not yet. Not as long as the Treasury can finance federal deficits by borrowing and the stock market hasn’t collapsed.

But the Fed is in a trap of its own making. It doesn’t really understand what is going on. It thinks there is a problem in the economy caused by consumers who are unwilling to spend. It believes it should use its policy tools to help pry the money out of their pockets. Trouble is, consumers don’t have any money in their pockets. And if they did have some, they wouldn’t want to spend it.

Of course, the Fed knows this much. But they think that if they can get people spending again, the economy will take off, employment will rise, incomes will go up and everything will be hunky dory again.

They don’t seem to wonder why – if things were so hunky dory in the bubble years – there was a crisis in the first place. Never once have we heard anyone of them – not Bernanke, Summers, or Geithner – explain that the private sector had run up too much debt (largely because of their own economic policies)…and that now it is paying the price.

Instead, they think the economy is sick and that they are all Dr. Schweitzers. The whole thing – meaning, the body of ideas, theories, prejudices, plans and programs of the financial authorities – is really asinine. Which is what is really interesting about this episode in history. So many very smart people have come to believe such absurd things. It’s a marvel. And marvelously entertaining to watch. What will they say and do next?

They don’t have much choice. Their silly ideas drive them into silly positions…from which there is no gracious exit. The economy is correcting from too much debt. They’re determined to stop the correction with the only thing they have to offer – more debt. And funny money, of course.

They’re not stupid, though. They also know that they can’t go too far or they will do even more damage than they’re doing now. So, they’ll save that disastrous step for later…when they’re really desperate. Then, we’ll see them print $2 trillion. Or print $3 trillion. Or more.

In the meantime, it’s “muddle onwards” for the authorities! One misstep after another. Headlong into one trap…then onto the next!

Trade well and follow the trend, not the so-called “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the banksters




Previous Day's Trading Room Results:

Trade Date: 8/11/10

E-Mini S&P Trades*
(before fees and commissions):


1) No "Secrets" trades filled today.

2) Algorithm positions (15)

3) “Reading the Tape” positions (15) combined Secret’s, Algo, & “Reading the Tape” total… +3.25



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