This would probably never be my call. I am an investor, not a market timer. I buy companies, not group-think. Alot of negative group-think seems to be going around these days. My title was the call of CNBC’s Fast Money contributor, Brian Kelly, last Friday (1/29/16). The theory behind this bold move was that the Fed’s tight money policy was going to drive our economy and market into the ditch. Hmm, where have we heard this before? Oh yes, we heard from the new ‘Bond King’, Jeff Gundlach, a-week-ago Friday. This video of Gundlach’s actual speech to an ETF conference in Florida gives a real flavor for the hype and urgency he lends to his critique of Fed policy. I love this video. It is a quintessential example of the fear stampede being generated by the media and punditry … a fear stampede with little or no merit.
Judging by Kelly’s demeanor in the attached clip (Trader: BOJ added fuel to ‘global wrecking ball, the dollar’) and the fact Friday found most of the major US indices up nearly 2.5%, I’d say Brian was ending a rather painful week. I say painful, because I have never known this guy to be positive. But, he may be a great contrary indicator, for back in May of 2010 (another important low–DJII at 10,380), Brian (then with a firm called Conundrum Capital) was hanging crepe again … “I’m a Seller.” The conundrum for me is, how does Brian, or “beaks”, as they call him in the video, rate a pundit spot on CNBC. Also, adding to Kelly’s agitation was stable-mate, Tim Seymour, giving him an indirect jab, saying, “If you have been fighting central banks for the last five years, you are dead.” Of course, that is exactly what Brian has been doing.
Now, I cannot criticize him for being wrong or defending his position. I have been there and done that. But, this is a bit more than that, because he is in the media spotlight, hyping/talking his own fearful and negative position. And his focus on the Fed and Fed policy as wrong-headed and dangerous (TIGHTENING) is really gaining traction among those who do not know better. There are many investors out there who are fearful that a repeat of 2008 is just around the corner, in large part because of this intense harping. Again, there is nobody there to point out how bad this guys market/economic call has really been.
Just how bad is the ‘tightening’ or their plans to tighten?
First of all, what does the Fed do when it wants to tighten monetary policy?
- It can raise the discount rate — the rate charged to member banks on short-term loans. The discount rate is .75%. It has been that way since January 2010. Prior to that it had been .50% since November 2008. The tightest/ highest that rate ever reached was 14% in 1981. This has not changed, ergo, no tightening here.
- The Fed funds rate target, set by the Fed Open Market Committee, was .00 to .25%, it is manipulated by adding to or removing reserves from the banking system (Selling Fed held securities = removing reserves/ Buying securities (QE) = adding reserves). It had been trading around .28%. The target was moved in December to a range between .25 to .50%. It currently is trading at .38%. The all-time-high occurred in 1981 at 18%. The Fed has stressed any moves would be data dependent. There is no hard-fast schedule (an assertion Gundlach has been making –7 times by the end of 2017). This is not tight and this is not scary.
- They also may change the level of reserves that the Fed requires member banks to keep at the Fed, thus raising or lowering the ability of the member bank to lend. They have done nothing here.
- One last very important Item. Before the financial crisis, the Fed held reserves of $700 to $800 billion. Quantitative Easing (QE) saw them acquire $3.7 trillion more. The banking system really never loaned on those reserves. And, the Fed has never done anything to remove those reserves. They are rolling everything that matures back into the pool. THIS IS NOT TIGHTENING.
Bottom Line: There is plenty of liquidity in the Federal Reserve System/ Unused Capacity… and no signs, in terms of their rhetoric that this will not be the case for the foreseeable future. Rate increases will come, but at a moderate pace and from historically low levels.
Oh yeah, Pundits, Commentators, Talking Heads please stop referring to Fed Policy as the ‘Fed’s Tight Monetary Policy’. It Isn’t!!
What’s your take?
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1 thought on ““I WENT TO CASH TODAY””
Great column, Bill. One of your best. As you point out, these “pundits” are just aiming for headlines and possibly new clients who favor hitting the panic button. As in the Presidential contest this year, the reasonable voices are being sidelined in favor of extremists. Personally, I think you should be the CNBC commentator!
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