What the Fed's Chart Illiteracy Means For the Markets and Economy

Phoenix Capital Research's picture

Yesterday, we assessed the Fed’s failure to accurately assess the real problems of the economy.


In simple terms, the Fed under the guidance of Alan Greenspan, was terrified of deflation hitting the US. Greenspan hired Ben Bernanke, an alleged expert on deflation and the Great Depression to combat this.


The two Fed Presidents then proceeded to create an epic bubble in nearly all asset classes. By concentrating on deflation they missed the boat and in fact created a highly inflationary environment.


You can reread our first article here.


The dreaded deflation briefly appeared from late 2007 to early 2009. The Fed went ballistic fighting this and has since become even looser in its monetary policy, lowering interest rates to zero and printing over $4 trillion.


The end result?


Inflation is once again soaring in the US. Oil is back above $100 per barrel. Stocks have more than tripled from their 2008 lows, and housing is now more expensive relative to incomes than it was in 2007 for some markets.


Inflation is a reality in the economy, but the Fed likes to publicly argue that inflation is too low or virtually non-existent because bond yields remain at historic lows (see below).



However, the Fed is missing the big picture here. The reason bonds continue to fall in yield is because:


1)   Wall Street is front-running the Fed’s QE programs (buying bonds from the Treasury and then flipping them to the Fed for a quick profit).

2)   Financial institutions, particularly in Europe, remain highly leveraged and so are seeking higher-grade collateral by buying US Treasuries.

3)   The Fed has created an artificial floor beneath Treasury demand by soaking up half or more of all US debt issuance each month for the last five years.


Remember, Fed officials cannot and will not openly threaten to change policy. Instead they will first hint and insinuate that a change is coming before finally making a move.


However, the Fed’s moves usually come much too late. The inflation genie is already out of the bottle again in the US.  The question is how bad it will get before the markets begin to ignore the Fed’s asset purchases and we begin to see the normalization of interest rates.


Let us conclude this article regarding the US with an illustration of the current problem of asset price inflation versus a weak economy. Below is a chart showing the performance of basic materials stocks (black line) vs. the price of the actual basic materials themselves (blue line).


Materials stocks are closely aligned with Fed policy and money printing. The basic materials themselves are closely aligned with actual economic activity as maintained by supply and demand. Note the massive divergence with stocks being sharply overpriced relative:



You can literally see that the stock bubble (inflation) took off in late 2013/ early 2014. With the Fed now tapering, at some point these two items will reconnect. The question is when.


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://phoenixcapitalmarketing.com/special-reports.html.


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research



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AdvancingTime's picture

I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large  percentage of wealth into intangible products or goods. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises be left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.


no more banksters's picture

US debt held by the Federal Reserve at the end of 2013: A new record high!

Banksters “print” more money than ever!


GreatUncle's picture

Inflation = banker manipulation.

Comical really they boom bust the cycle so during the boom time you vote for them then during the busy cycle (normally short) you achieve 1 + (-1) = 0. Though they are still top of the pile, nice cushty life and all.

On putting the 2 lines togwther NOT A CHANCE as it would reveal the other metric so from here on in they will remain separate.

They are frealities  but onl thr most privileged are allowed to control it.

TVP's picture

Now is the time to get into real estate.

Now is the time to buy stocks.

Go all-in.  


^ This advice is being given to all the sheeple right now.  

Won't be long before Joe six pack makes like a JP Morgan banker and hurls himself off a high-rise...

Stuck on Zero's picture

"The bond market shows little to no inflation."

Bond market?  There are no markets anymore.  Only sideshows.

JRobby's picture

Abnormal asset inflation

Abnormal price inflation in financialized (price supported) assets and services.

Abnormal markets

Now let's tackle that pesky calculus textbook............................



messymerry's picture

Can you put a hyperbolic spin on that?

lasvegaspersona's picture

I think what we are seeing is more a problem with the finite nature of the life of a fiat currency rather than just mismanagement. Yes silly things are done in the end but it is not just over printing of currency (and buying of poor quality assets) that caused the problem. These are things that were done in response to the problem of  (to quote Larry Summers) 'too much saving'.

The world continues to produce and the excess production needs a place to go so the producers can enjoy their excess production later. The dollar is the only place all that excess can go...well it can go into stocks and farm land but now they are way over priced.

This does not end well...but the reason is not just silliness on the part of the fed, it is a systemic problem. The solution will come in force and will be 'systemic.'

messymerry's picture

Ah yes, the question of the minute: When does it end and what comes after??? Wanna take a stab at it?

My opinion: Christmas 2016 will see a very different United States. What I think we will see is a huge inflation spike and then the bottom falls out. The Mother of All Depressions (or worse) and possibly WWIII. The kettle is definitely boiling... Time to make some tea.