Guest Post: The Fallacy Of The Fed Model

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Live blog,

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q99x2's picture

Hocus Pocus pull that hood off your head. Stocks go up because they are connected directly to the FEDs infinite money supply. It is a computer thing.

AlaricBalth's picture

ZH readers should be quite familiar with the fallacy of the Fed Model. It was covered quite succinctly just a few months ago.

razorthin's picture

But, but, how else would my 401k stawks stay up??  I'm a dumbass plebe, and that's all it really takes to keep me docile.  $Trillions well spent.

slightlyskeptical's picture

Stocks would ramp up as consumers will finallly have money to spend and shareholder sstarted holding the company managers to task.

vmromk's picture

Bernanke dangling at the end of a hangman's rope, now that would be a true Fed model.

buzzsaw99's picture

the fed model when compared with wall street bonuses is a perfect match

Salah's picture

The Fed is simply a contractor....albeit exclusive contractor to the that has largely not changed since its inception.

The US Government uses lots of contractors; i.e. Los Alamos Labs is run by a Bechtel-University of California combo, Sandia National Labs is run by Lockheed-Martin, and so on across the govt spectrum.

The USG needs to RECOMPETE the Fed's contract, same as they do with numerous other large scale govt contracts. 

Do you guys really trust CONGRESS to manage the nation's money?.....I sure as Hell don't.


slightlyskeptical's picture

If they are given the proper rules to play by i would be ok with it.

I think they should operate with pure fiat and eliminate taxes. Limit growth of the budget to 2%. Anything above that requires a national referendum to levy taxes. It better be a damn good thing for it to be passed.

It could work but ultimately will keep bankers from get a portion of every dollar, thus the resistance you see here and everywhere in the financial world.

Bear's picture

As long as the Blue Sky is around ... dump the income tax and tax consumption (i.e VAT) only. It forces savings and true investment and would right the listing ship of state. Keeping up with Jones would be a hell of a lot easier. Our whole economy is build on debt and consumption ... both of which will crush you in time.

TooBearish's picture

This simply doesn't hold up in theory or practice.

Billshit - its working great - central planning is making all us bulls rich - BTFD

moneybots's picture

"Without such support from the Fed, as we have seen after the conclusion of the previous Q.E. programs, the markets, and the economy, would quickly begin to contract."


Isn't that why this QE is supposed to be open ended?

Dr. Engali's picture

It's funny how many things quit working in that 71 to 73 period. Let's see what happened in 71 that might have changed everything? Hmmmmm..... Nixon was president.....

Diogenes's picture

Nixon is to blame for everything bad that happened since 1968.

moneybots's picture

Chart Heading:  Wall Street Has Wanted Investors To Stay In Stocks.

Well, they wanted investors to stay in stocks, while they sold off to them at the top.  They wanted investors to sell at the bottom, so they could pick up cheap shares to profit from.

At the top of the housing bubble, Cramer said he would never sell a Toll Brothers because it was a land bank.  Good thing the Toll brothers didn't listen to him and dumped some 400 million worth of shares.

Good thing the Wall Street insiders didn't wait until Goldman took APPLE off its conviction buy list.


Wall Street games investors.

Sechel's picture

Fed drives down interest rates to zero and stocks are cheap relative to bonds, which should not come as a surprise. But today, EVERYTHING IS CHEAP relative to bonds. So why buy stocks? And more importantly, should the Fed no longer decide to floor interest rates, or for some reason no longer be able to, what happens to stock prices then?  The argument that we should buy stocks because the Fed has manipulated bond pricing to yield close to 0% seems flawed and dangerous.

Downtoolong's picture

It is dangerous. But nonetheless, that is their plan which they are trying to force everyone to follow against their will. And the question is, who can hold out the longest; the Fed with it's infinite printing press, or you with your savings and bonds slowly erroding away to zero via inflation?


hannah's picture

cant tell you how many professors i had that lived by these calculations. i never liked the idea but every financial anal lives by this shit......

August's picture

"However, the problem for the Fed has been a failed transmission system which has left the "wealth effect" trapped at the upper end of the economic spectrum...."

Golly-gee whiskers!

What a unforeseen and terrible shame!  All that liquidity just stuck there in the top economic strata of our American Republic!

Mototard at Large's picture

We are going to have an all Goldman Sachs MMA cage match between incoming Bank of England Governor Mark “Brutal Reckoning” Carney and the ECB's Mairo “Whatever it Takes” Draghi as different ideas emerge on how to deal with fragile and fragmented economies.   Draghi appears to be for more QE and low interst rates while Carney has said stuff like "the bond market is there, until it isn't"  and "cheap money is not a growth strategy.  For a fun look at the cage match that is coming:

Rocket surgeon's picture

Lots of discussion about an outdated model. The paper 'Understanding the Fed Model, Capital Structure, and then Some' by Timmer offers an alternative explanation that makes theoretical sense.