The Federal Reserve’s tools for achieving its dual mandate

of low inflation and full employment manipulate interest rates and therefore

markets.- This manipulation of rates reverberates

globally. Their manipulation historically had been more light handed and

invisible to most of the public. - However, over the last decade, their impact on

interest rates and yield levels have been the most dramatic in the history of

the Federal Reserve.-

Whenever you have policies that are extreme, it is best to

stay at extremes for the shortest time possible.- Newly employed policies always have unknown

and unexplored side effects that can prove to be harmful and detrimental. - For instance, pharmaceutical companies have a

long testing period before new products can be offered to the public.- But monetary policy works with impunity towards

negative consequences.- No accountability

and the subterfuge of finding other scape goats encourage testing these extremes.

During economic downturns, the Federal Reserve experiences

pressure from politicians and the public to act in whatever manner necessary. - Pressure to adequately address what are normal

and healthy corrections in long business cycles is smothering and the Federal

Reserve members oblige. - But obliging

over the past decade without reverting policy back to normal has created unprecedented

low levels of interest rates and trillions in bonds on the Fed’s balance sheet,

flooding the banking system with an unhealthy amount of funds.

The Federal Reserve has arguably achieved its dual mandate years

ago. - The employment situation has been

healthy and healed for years and now is considered historically as tight as

this country has ever experienced.- This

will lead to scarcity of labor in certain sectors going forward.- Businesses will be confronted with higher

labor costs competing for limited resources or relocating to areas with more

abundant labor.

But what about inflation? - The Fed’s preferred gauge of inflation seems

to be running at or slightly below their targeted level of 2%. - Sounds like they have hit their target even

though they have pursued the most aggressive monetary policy in the worlds

history.- Shouldn’t we have runaway

inflation with such easy central bank policies?

Unfortunately, we do.-

Inflation is, simply put, out of control.- If the Fed took their inflation blinders off

and included asset prices into their inflation statistics, the negative

ramification of their policies would be apparent.- Fed policies have led to hyper- inflation and

parabolic moves higher in certain financial asset classes.- Inflation in goods and services consumed can

be difficult for the public.- But this

type of inflation does not lead to systemic issues putting the economy at risk

of a severe downturn.- However, the

financial asset inflation Fed policy has created, but turns a blind eye to, is

dangerous and destructive and can take years to remedy.-

One asset class that typically shows Fed induced asset

inflation is in housing.- - In 2006, easy

Fed policy lead to rapid inflation in this asset class and contributed to the

protracted downturn and systemic issues of 2008 and beyond.- Current Fed policy is producing gains in

housing two to three times the rate of preferred Fed calculated inflation.- History sure does rhyme if not repeat.

Housing is a more visible asset class that is easy to see asset

inflation - or bubble like conditions - as they happen.- - Another

asset class that has seen significant asset inflation and bubble lie conditions

are crypto-currencies such as Bitcoin.-

Bitcoin has had meteoric appreciation of around 1,500% this year.- Fed policy of taking all interest away from

savers for such a protracted period have made alternate stores of value that

also pay no interest a viable alternate currency.- Had the Fed not changed the system of fiat

currency that encourages holders by providing a level of interest that is

greater than the loss of purchasing power, such alternate currencies would not

be making headlines.- Worse, now that

they have been receiving such media attention, people are investing and using

these currencies without realizing, like the tulip mania, the crypto store of

value may just be a fad with nothing to show once the fad runs its course.- At the end of tulip mania, fortunes were

ruined, but the gardens still had pretty flowers to console.- I hope a Bitcoin screensaver will console as

well when its store of value disappears.

How many other crypto-currency like bubbles are percolating

under the system?- How much asset

inflation have we experienced since the Fed unleashed the easiest monetary

conditions upon us?- Questions, that when

answered, will leave many with losses and economic difficulties.- Is it worth turning a blind eye to the asset

inflation byproduct of Fed policy because it is not measured in preferred inflation

metrics?- Some say ignorance is bliss.- Is it?


by Michael Carino, Greenwich Endeavors, 12/7/17


Michael Carino is the CEO of Greenwich Endeavors and has

been a fund manager and owner for more than 20 years.- He has positions that benefit from a

normalized bond market and higher yields.- -

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