Thursday, January 26, 2012

Fed Announces Three More Years of Cheap Money- Markets Go Nuts

Traders at the Chicago Board of Trade get hysterical after the Fed announcement of 3 more years of cheap money for speculators. They are making furious bids even as the yields crashed on 2, and 5-year Treasury notes.

Ben Bernanke and the Federal Reserve yesterday announced at least three more years of near zero Fed interest rates, and the markets responded as you would have expected. The DOW shot up to 12,756 or its highest mark since May of last year. Meanwhile, traders in the two and five year options pit at the Chicago Board of Trade went ape shit. And why not? The yield on the five year Treasury note hit an all time low on the news. We already saw, 2 weeks ago, the yield on the 30-year Treasury note hit the unheard of low of 3.09%.

Can these all go lower, along with CD, and money market account interest rates, punching savers in the gut? You better believe it! Meanwhile, the Fed has shown again what a hostage it is to the Wall Street Speculators and the already unstable bubble market created- merely awaiting one pin prick, perhaps from spiking oil prices (arising from the Iranians shutting off the Straits of Hormuz - with Russian threats standing behind them) or another European series of downgrades or debt surprises.

Basically, all those in the stock market are living in a fool's paradise.

Savers, that is safety -oriented folks who don't wish to see their 401ks popped and imploding by 40-50%, don't have many choices. Basically it's either passbook savings at about 0.0001% or maybe money market accounts and CDs offering a current whopping 0.6% and which are now likely to head south of 0.5%. That means that $10,000 put in one of these instruments will yield a whopping $50 interest over a year. That's barely enough to go to a movie twice and buy popcorn and cokes.

According to one talking head on MSNBC's "The Street" this morning, the idea is for savers to "go to equities" and try to get dividends and realize once and for all they will only be able to garner chump change until 2015. Trouble is, it was equities that took the main hit in the stock meltdown of 2008, which cost 401k folks most of their hard won retirement bucks, forcing many to look for work - and now hopefully, keep at it until they make those losses back....maybe by 2020.

The hard fact is that conservative savers are left with very few options, other than those of increasing risk. My viewpoint is simple: so long as risky derivatives are unregulated and infiltrating stocks, and mutual funds - and so long as the expenses, commissions in both are downright outrageous, I'm not going into either of them. If that means cutting back on many things over the next year, so be it. But it's better than having to eat catfood or Kibbles the rest of my days.

Bernanke and his Fed mavens argue that the current post-recession economic climate of continuing slow growth supports this move, along with an inflation rate of 2%. As I noted before, that 2% rate is false, and to disprove it all you need to do is make a trip to the gas station or the grocery store. Or....order prescription drugs on Medicare Plan D. But see, the Fed in its computation of inflation rate, excludes the very items, factors contributing most to inflation! How tricky is that? Well, maybe about as much as the BLS (Bureau of Labor Statistics) dropping unemployed folks from the unemployment rolls after 6 months and reclassifying them as "discouraged". Ahhhh,,......the tricks that must be pulled in a market economy to make it appear sound!)

In addition, the Fed continues to mistake a balance sheet recession (of which this economic slow growth is a byproduct) with a standard over-quick recession. In the case of the balance sheet recession, the wiser move would be to eliminate all the Bush tax cuts, which contrary to GOP mythology (which Dems also seem to be buying) that "low taxes create job growth"). No they do not, and The Financial Times analysis (9/15/10) of ten years of the Bush tax cuts disproved that canard.

So long as we have prolonged and regressive tax cuts adding to the deficit, and government, the public and business all under the stranglehold of a low aggregate demand environment, nothing will significantly change, matter how many freebies the Fed tosses the speculators. Worse, the cheap money strategy of the Fed threatens to incept dollar debasement even as it rewards the privileged moneymen, high finance and foreign speculator types with cheap credit while it denies it to small businesses, entrepeneurs and those seeking private mortgages or even college loans. In a word, this is lunacy. The only thing we may be sure of is that another bubble will inflate, and this one may be worse than the one that burst 3 1/2 years ago.

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