Stock and bond investors are now paying the price for the Fed’s dangerous experiment

The Federal Reserve’s changing of the guard — the end of the Janet Yellen’s tenure and the beginning of the Jerome Powell era — has me remembering what it was like to grow up in the former Soviet Union.

Back then, our local grocery store had two types of sugar: The cheap one was priced at 96 kopecks (Russian cents) a kilo and the expensive one at 104 kopecks. I vividly remember these prices because they didn’t change for a decade. The prices were not set by sugar supply and demand but were determined by a well-meaning bureaucrat (who may even have been an economist) a thousand miles away.

If all Russian housewives (and house-husbands) had decided to go on an apple pie diet and started baking pies for breakfast, lunch, and dinner, sugar demand would have increased but the prices still would have been 96 and 104 kopecks. As a result, we would have had a shortage of sugar — a common occurrence in the Soviet era.

In a capitalist economy, the invisible hand serves a very important but underappreciated role: It is a signaling mechanism that helps balance supply and demand. High demand leads to higher prices, telegraphing suppliers that they’ll make more money if they produce extra goods. Additional supply lowers prices, bringing them to a new equilibrium. This is how prices are set for millions of goods globally on a daily basis in free-market economies.

In the command-and-control economy of the Soviet Union, the prices of goods often had little to do with supply and demand but were instead typically used as a political tool. This in part is why the Soviet economy failed — to make good decisions you need good data, and if price carries no data, it is hard to make good business decisions.

When I left Soviet Russia in 1991, I thought I would never see a command-and-control economy again. I was wrong. Over the past decade the global economy has started to resemble one, as well-meaning economists running central banks have been setting the price for the most important commodity in the world: money.

 

Interest rates are the price of money, and the daily decisions of billions of people and their corporations and governments should determine them. Like the price of sugar in Soviet Russia, interest rates today have little to do with supply and demand (and thus have zero signaling value).

For instance, if the Federal Reserve hadn’t bought more than $2 trillion of U.S. debt by late 2014, when U.S. government debt crossed the $17 trillion mark, interest rates might have started to go up and our budget deficit would have increased and forced politicians to cut government spending. But the opposite has happened: As our debt pile has grown, the government’s cost of borrowing has declined.

The consequences of well-meaning (but not all-knowing) economists setting the cost of money are widespread, from the inflation of asset prices to encouraging companies to spend on projects they shouldn’t. But we really don’t know the second-, third-, and fourth derivatives of the consequences that command-control interest rates will bring. We know that most likely every market participant was forced to take on more risk in recent years, but we don’t know how much more because we don’t know the price of money.

Quantitative easing: These two seemingly harmless words have mutated the DNA of the global economy. Interest rates heavily influence currency exchange rates. Anticipation of QE by the European Union caused the price of the Swiss franc to jump 15% in one day in January 2015, and the Swiss economy has been crippled ever since.

Americans have a healthy distrust of their politicians. We expect our politicians to be corrupt. We don’t worship our leaders (only the dead ones). The U.S. Constitution is full of checks and balances to make sure that when (often not if) the opium of power goes to a politician’s head, the damage he or she can do to society is limited.

Unfortunately, we don’t share the same distrust for economists and central bankers. It’s hard to say exactly why. Maybe we are in awe of their Ph.D.s. Or maybe it’s because they sound really smart and at the same time make us feel dumber than a toaster when they use big terms like “aggregate demand.” For whatever reason, we think they possess foresight and the powers of Marvel superheroes.

Warren Buffett — the Oracle of Omaha himself — admitted that he doesn’t know how the QE experiment will end. And if you think well-meaning economists running central banks know, you may have another thing coming.

Alan Greenspan — the ex-pope of the Federal Reserve — in a 2013 interview with the Wall Street Journal said that he “always considered [himself] more of a mathematician than a psychologist.” But after the 2008-09 financial crisis and the criticism he received for contributing to the housing bubble, Greenspan went back and studied herd behavior, with some surprising results. “I was actually flabbergasted,” he admitted. “It upended my view of how the world works.”

Just as the well-meaning economists of the Soviet Union didn’t know the correct price of sugar, nor do the good-intentioned economists of our global central banks know where interest rates should be. Even more important, they can’t predict the consequences of their actions.

 

Vitaliy Katsenelson, CFA
Student of Life, CIO

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Even in Polish!)

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

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Comments

SunRise Thu, 02/08/2018 - 18:57 Permalink

"The consequences of well-meaning (but not all-knowing) economists".  I say, "The consequences of arrogant (out of touch with Reality) economists who actually believe their own judgments are superior enough to justify stealing my labor and robbing me of my goals in order for them to achieve their goals via my stolen body.  Abolish the Fed before they abolish you!

AlphaSeraph Thu, 02/08/2018 - 18:58 Permalink

I'm young have very few assets (7k in savings and investment). 55% silver. I bought a couple of good companies figuring a crash would see equity prices get hammered at some point.

The Fed (and CB's) may have done this on a central level but let's be real here - individual investors are responsible for their own money. Anyone who went full long on paper assets like a Muppet have done themselves in, fuck em.

not dead yet Thu, 02/08/2018 - 20:53 Permalink

What a dumb ass. Government cut spending. Sure they have cut spending in the past but manged to spend the cuts and more on other stuff. So overall government never cut spending at all. Peter got what they took from Paul.

new game Not if_ But When Fri, 02/09/2018 - 02:35 Permalink

central command econ run by fed res cartel. 08 was the real crash, but they learned they can print til oblivian and save the fuker for another day. every crony fuk came out of the woodwork and sucked some cash. the club. uncle warren is the honorary chairman.

simple shit maynard.

options:zero, cept to break the law or try to trade services and goods without an equalizer(the dolla).

In reply to by Not if_ But When

Crush the cube Thu, 02/08/2018 - 23:58 Permalink

Unfortunately, we don’t share the same distrust for economists and central bankers. It’s hard to say exactly why.

 

No it's not, they do it in secret while Congress acts like they're in control, and take the heat as the most hated assembly.

Bemused Observer Fri, 02/09/2018 - 00:18 Permalink

Jeez...the market shaves 10 percent off its over-inflated value, and suddenly we're on the potato line in Stalin's Russia?

Just think of what it's gonna look like at 25%.

francis scott … Fri, 02/09/2018 - 01:46 Permalink

Yes, Vitaliy, there is no Statute of Limitations on

'unintended consequences'  It droppeth as the

as the gentle rain from heaven, upon the place

beneath and the poor people who are still alive

when the shit hits the fan.

For example, when the Fed was created in 1913, did

any of the experts then know that 95 years later the

Fed would turn the printing presses up to 11 and not

stop until the Milky Way was paved with $100 bills?

 

Or after WWII, when Washington made the Saudis

sell oil at $3.00 a barrel to push economic growth full

throttle, that 'Peak Oil' was waiting in Grandma's bed

with a mighty thirst.  The 'unintended consequences'

of that brain fart was the 1967 war between the Arabs

and the Israelis, to put the oil embargo into place and

raise the price to $12.00 a barrel.  The experts in

Washington, like Mickey Mouse in the "Sorcerer's

Apprentice", made matters worse, until Iran threw 

out the Shah, whom the US had put on the throne, 

and the US backed Saddam Hussein and Iraq in a

decade long war with Iran.  After Saddam proved to

be an unacceptable proxy at getting Iran's oil back

on the US' balance sheet, our nepotistic, nitwit president

on the advice of his father, declared fake war on Iraq

and hanged Saddam.  The 'unintended consequences' 

of that caper should have been Iraq going into full

production of oil to postpone 'Peak Oil.' 

 

Alas, a bevy of other 'unintended consequences' were

waiting in the wings to destroy the Global GDP, and 

attack 'Peak Oil' from the demand side and on not from

the supply side as Bush thought.

 

Well, Vitaliy, if you bothered to have your article

published at this pathetic web site, you must also

know that it is frequented by Winklevossian Clowns,

who not only believe that there is unmeasured value

in crypto currencies, but that - I'll try to finish without

breaking down in laughter - oh oh, that

DONALD TRUMP ACTUALLY OUTSMARTED THE 

DEEP STATE. HO HO HO HA HA HA  OH NO  HAH 

HAH HO  HO OH NO I'M GONE I CAN'T STOP HA HA

HA  YES SIR THAT DONALD TRUMP OUTSMARTED

THE DEEP STATE HA HA HA HA HA HA HA

(gasping for breath) HO HO HO

 

 

 

 

 

francis scott … ktown Fri, 02/09/2018 - 16:00 Permalink

 

Wouldn't the Chinese love that!  I'll bet Xi dreams about it.

****************************************

You're right though.

American exporters of weaponry to the broke members of

NATO would love it.  As would Walmart and other importers

of cheap Chinese merchandise for broke Americans living

paycheck to paycheck.

In reply to by ktown

Expendable Container francis scott … Fri, 02/09/2018 - 14:15 Permalink

'peak oil' was fake - a psyop. Their latest TAVISTOCK/RAND CORP psyop coming in is Fake Water Shortages (practicing in Cape Town, S Africa right now) and its (sorry to say) about DEPOPULATION, and there's a lot more fake, psyop claims. Forewarned is forearmed:
https://www.youtube.com/watch?v=JeJkYovY0AM very important, verified info from their own source documents - listen to it ALL.
[The ancient dynastic families, including British/Dutch and all other Royalty, and worse, Ashke-nazi Rothschilds (all intermarried anyway - as are Rockefellers, Sassoons with Rothschilds), are the Inner Ring in a power system of rings within rings, each controlling the next Outer Ring (each ring not realizing there is one above in control (eg RIIA/CFR, freemasonry to name a couple of outer rings)]

In reply to by francis scott …

francis scott … Expendable Container Fri, 02/09/2018 - 19:02 Permalink

Do you know that when you start typing a reply to a comment

at ZH, that if you scroll back to the original comment

to click on a link in that may be in that comment, you will

lose whatever you wrote in your reply.  Isn't that sweet?

 

That's the kind of reply pages that the morons who run

the site at ZH expect us to be happy with.

 

We used to have something called "preview comment"

but the brain dead management at ZH, well, I think

you get what I mean.

 

So the 10 or 15 minutes I spent telling you why you

were wrong when you said 'peak oil' is fake, is gone

with the wind that blows around in the empty heads

of the cretins that run this web site, after I went back

to your comment to see what else you were babbling

about and clicked on the link you inserted.

 

Now I don't have the time to rewrite it to prove you

are wrong.

Have A Nice Day

 

 

 

 

 

In reply to by Expendable Container

Cosmicserpent Fri, 02/09/2018 - 02:50 Permalink

You sir, are naive at best. It's a big club and you ain't in it. It's the same club they beat you over the head. They want it ALL. And their going to get it. Because they are the OWNERS! 

 

 

SubjectivObject Fri, 02/09/2018 - 07:15 Permalink

eeesh

yet another disinfo artist masquerading with "alt" muddia cred

on what basis is the Fed's actions assumed/interpreted to be an experiment?

howabout every time we have to report Fed actions, we lead with something like: 

Today the surreptitious Fed ....

there should be no limit on the available incriminating adjectives for their long history of oligarchic malfeasance

BigSwingingJohnson Fri, 02/09/2018 - 07:35 Permalink

firstly, vitally, there are no "well-meaning (but not all-knowing) economists". they are prositutes who get high pay  and secure life-long jobs to pedal this BS (that American for bull shit). secondly, they do not want to work hard to make a similar lifestyle. Socialism is great as long as I get to run things.

 

bond006 Fri, 02/09/2018 - 07:41 Permalink

one psychopath I knew called it "twixxing"...I asked what is twixxing and he said, "that is when one adjusts something so that it is not quite right and is skewed as a result...the fun part is that most people don't notice before it is too late"...I said to him, "you are one sick mofo".

juggalo1 Fri, 02/09/2018 - 08:27 Permalink

Because quantitative easing led to runaway inflation in US and Japan.  Oh wait it didn't.  How many years do you have to be wrong before you change your theory?

WHATDIFFERENCE… Fri, 02/09/2018 - 10:29 Permalink

After the tech crash I bailed paper assets and went long land and pm and o&g...tangibles. Follow the asset class positions of the .01% and you will maintain your net worth. Ex: 401ks were setup for the .01% to steal from when they deem necessary. 

 

hibou-Owl Fri, 02/09/2018 - 12:26 Permalink

The CB "experiment" is truly scary, 

Buybacks have loaded up corporations with debt, margin debt is stupidly high, and we are beginning to see the level of true leverage.

When this mess unwinds, wide spread bankruptcies of companies, pension funds will disappear, and banks will take an almighty hit.

It will put the capitalist system back into the stone age, and it will be back to basics.

The issue is its quite probable and could happen very quickly.

Blano Fri, 02/09/2018 - 13:18 Permalink

"The U.S. Constitution is full of checks and balances to make sure that when (often not if) the opium of power goes to a politician’s head, the damage he or she can do to society is limited."

Somebody just woke up from an 8 year nap.

The damage has already been done, Vitaly. Whether it can be fixed or not, and peacefully, are the only questions left.

Expendable Container Fri, 02/09/2018 - 14:07 Permalink

"Quantitative easing: These two seemingly harmless words"

like the two seemingly harmless words "Collateral Damage".

All your typical TAVISTOCK INSTITUTE/RAND CORPORATION people-programming

RTUT Fri, 02/09/2018 - 14:40 Permalink

When political ideology mixes with economics we have QE.  When political ideology mixes with mortgage loan applications we have the 2008 mortgage crisis and the coronation of Barry Obama, two huge bombs.