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Friday, January 31, 2014

FEDy Got Fingered

If you have never seen the Tom Green film , “Freddy Got Fingered” DON’T its probably one of the worst movies ever made completely stupid and a “gross out” movie. Tom Green plays Gord, a 25 year old unemployed (kind of apropos for these days) cartoonist, who is forced to move back in with his parents and younger brother named Freddie. Well long story short the parents played by Rip Torn & Julie Haggerty (how low can they sink but I guess work is work) after a period of time decide they want Gord out of their house. So of course this is not what Gord wants so he spreads a rumor that his father sexually abused his little brother Freddie. Dear reader, as I said before this is no Oscar candidate and I can never get back the lost 87 minutes of my life spent watching this disaster but there is a message. The theme is that while in order to achieve an end or obfuscate the truth today it seems from individuals to institutions that they will make things up to cover their own errors or achieve a specific outcome.  

So in this case it is my supposition that the FED and the US Government are boldly proclaiming the economy is in recovery, maybe but it’s the weakest of any recovery in the post World War Two period. We also have the lowest labor participation rate since the 1970’s yet this is being spun as a good thing since the unemployment rate now stands at 6.5%. Additionally, if things are so wonderful and improving why is it that the US keeps setting record after record of people requiring aid especially food stamps. The FED and Government are doing this because they are obfuscating just like Gord did in the movie. The Fed and the Government do not want to admit their policies at almost all levels are not only a disaster but also the majority of the cause of our problems so they try and point to other things to deflect attention.

We all know that QE has been a giant failure as far as getting the economy back on track, instead it bought time staving off a big decline. The problem Dear reader is all the QE may have prevented a “Greater Depression” but at some point the price has to be paid. The FED thinks it can painlessly pull the plug on QE by “tapering” but just as I pointed out in my prior missive there are always consequences. 
The Reality is the FED knows full well that their actions will have repercussions and they are trying to finger it on anything but the truth.  The problem Du Jour is the Emerging Markets and the FED and others are fingering them for the swoon in our markets. The reality is that while the FED pontificated that Taper would have no impact on rates or anything else for that matter; they were either lying or did not realize that they were breaking one of the components of the “Flux Capacitor” containing inflation, namely all the hot money pouring into the Emerging Markets.

The irony of all the “hot” money exiting the EM is that it temporarily boosts the Dollar and may even drive rates down as people look to park money while they figure out which end is up. The strength in the Dollar and the fall in rates will be fleeting in my opinion because it is not driven by a fundamental shift of strength in the US but instead because of a policy change and “hot” money is notoriously fickle.

The FED has driven the “Taper” not because it is what they believe but because of global political pressure. This pressure has stepped up over the “QE” era and has manifested itself in countries looking to escape the dollar, form bilateral trade agreements outside the dollar and even calling for replacement currencies.  I do not believe the FED worries about the value of the dollar or really it would not have declined in value some 95%+ since the FED’s inception in 1913; instead at this point they are more concerned about retaining reserve currency status. The net result is that the FED will finger everything but its own policies in order to “maintain” world “trust”. 

You see dear reader, if the US loses its reserve currency status then it is essentially game over for the FED, Government and sadly the populace. There is a lot at stake here and unfortunately confidence is being placed in people that generate policies like QE and Taper. The world is not pleased even just this morning there was a shot across the bow from India. The Indian Central Bank Chief Rajan is completely correct in pointing out that the economies of the globe are all interconnected, yet Washington and the FED act without consideration of the effect on others, a policy that will come home to roost in the near future.  Rajan is not alone in pointing these issues out in fact Putin, the Chinese leadership and others are all singing form the same hymn book.  The bottom line is the FED and the Government can lay blame all they want to keep doing as they wish but it will not stop reality form taking its toll.I know dear reader, you always hear about how the Dollar can not be supplanted because no currency is deep enough and so forth, but if trust is lost it matters not how deep the pool is only that the water is not toxic to your financial health. Furthermore, thru out history there have been currency paradigm shifts even so recently as the end of World War 2. It would be highly educational to have a time machine and travel back to1930's England and ask people in that time if they could ever see the Pound Sterling losing its primere reserve currency status.  Just like today if you float the notion that the Dollar could be ousted people would have thought you a lunatic.


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