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The Wizard of Fed Oz

Oz

Pay no attention to that man behind the curtain 

As we watch yet again the confusing signals of the stock market and the actions of the Fed Reserve, I can’t help but think of the classic movie the Wizard of Oz.   The last 8 years have certainly been the most bizarre and confounding mix of economic data, Fed policy and market conditions that basically contradict almost every single standard that was used by the Fed for decades.   The manipulation of economic indicators of the last 8 years has been nothing short of magical when you consider some basic economic principals known as supply and demand.  Let’s rewind a few years ago when the fed basically lowered the fed rate to banks to  .25%.  In other words, Banks could borrow from the Fed window at ¼ of one percent with the idea that they would loan to businesses and homeowners at say a 4% rate.  This would spur economic development and growth and allow middle class Americans to recover from the 2007 meltdown of our banking industry.  Instead the economy went largely stagnant and millions and millions of Americans left the work force and housing stayed in a state of abandoned flux for many years.  Curiously though, Oil prices began to surge through the roof and were hitting $4.00  a gallon in many cities which was puzzling to say the least.  The USA is the largest consumer of oil, and despite the fact that millions of Americans were unemployed and obviously not driving to work every day, the prices just kept sky rocketing.  In fact, oil surpluses were and have been at record level for years now.  Today, gas prices are at 10 year lows despite the fact that the government say unemployment is at 10 year lows so the math is quite foggy at this point so let’s see if we can recap this:

 

  • Economy goes into the tank and interest rates are at record lows
  • Housing and business development stays are records lows
  • Tens of millions are unemployed or under employed
  • Oil goes to record prices due to less demand and record surpluses
  • The stock market continues to set record highs year after year
  • The stated unemployment goes from roughly 10% to 5% but rates remain the same for years
  • Today we have 10 year lows on oil prices
  • Anytime the Fed mentions a rate hike of even a 1/4 point the market collapses until the Fed relents

 

The Fed finally raised rates reluctantly in December and Wall Streets reaction to it is comical to say the least.  Truthfully, not one single economic indicator can be trusted because the math of the time trusted ‘Supply and Demand” no longer adds up.  There is literally no precedent for the Feds action (or lack of) over the past 10 years.  As we start the new year with some ugly economic numbers as well as a stock market plunge, I’m reminded of Dorothy and her friends coming back to Oz with the broom stick of the Wicked Witch and despite all the thunder, lightning and smoke screens, there is a little curmudgeon on the left imploring them to “Pay no attention to the man behind the curtain”!!!!!

The simple truth of the matter is that our entire economic base and policy is built on a series of manipulation and smoke screens and if you need proof here are some tidbits to chew on.

  • In 2015 Initial Public Offerings (IPO) raised a total of 30 billion. In 2007, the year the recession started, 49 Billion was raised. Does that make sense if the economy is fully recovered? Click here for report How come there isn’t more optimism?
  • In 1999 there was the Fed policy regarding ‘Irrational Exuberance” with investors in the stock market and the Dow finished at 11,447 and the Fed began raising interest rates to curb this appetite for equities and the stock market.
  • The fed lowered interest rates to less than 1% in 2008 and left it at that rate for 7 years despite the stock market rising to record highs of 18,300. (That’s not irrational?)
  • The stock market has reacted to a rise from .24 to .36 effective fed rate hike with a market plunge of over 2000 points? In what world does that make sense if you are bullish on the economy, GDP and recovery?
  • With the recent economic data regarding unemployment claims jumping to 284,000 last week (300,000 or more claims is considered indications of a recession) what is the Fed plan if claims indeed jump a mere 16,000 next week and beyond?

 

There really is neither rhyme nor reason to the fed policy. Almost every tried and true economic theory is being manipulated or ignored.   There literally is nothing to indicate why any of these actions are occurring, although I particularly like the theory that ISIS has taken control of oil fields and is selling oil for rock bottom prices.  I fear the men and women behind the curtain playing the Wizard of  Fed Oz might know something we don’t and are hoping and praying this game of smoke and mirrors will somehow turn into a tornado that will send them back to Kansas just like Dorothy for the Happy Ever After Ending.   In the meantime, I think its time to revisit the great movie “JAWS” and listen to the shrewd words from Sheriff Brodie who famously said: ” WE ARE GOING TO NEED A BIGGER BOAT”

 

 

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Date
January 15th, 2016

Author
jbusacca

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