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The world was
taken by surprise recently by the Federal Reserve Board's announcement that
it would publish some of its economic forecasting that forms the basis for
its short-term interest rate strategy. The Fed claims that the move will
vastly increase so-called transparency, which has become a buzz word for
honesty and virtue. However, the new policies do nothing to remove the cloak
of secrecy that conceals still many of its most significant activities. This
myth of new transparency will do little to lure investors back into the
markets but as an unintended consequence will reveal just how profoundly the
markets are currently guided from the top.
The Fed plays
the markets like a football game, and Ben Bernanke is currently calling all
the plays. Although investors are mere lineman in this struggle, there are
things we can do to stay in the game. When tackling a ball carrier in
football (or in the rugby played in my home country) it is best to ignore the
movement's of your opponent's eyes or hands which
can be used to obscure his true intentions. Instead, good coaches tell us to
fixate on the runner's feet as the best indicator of his actual path down the
field. Likewise, when looking at any political body, like the Fed, it is best
to look at their actions and ignore their words.
Bernanke
offers endless words about the Fed's willingness to keep the economy on
track. In reality it appears as if he only wants to do one thing: keep asset
bubbles from collapsing by continually debasing the currency and looting the
savings of thrifty Americans. Any other policy intentions should be
considered misdirection.
The Fed was
the enabler of the most massive asset and debt boom in history. Now, the
unraveling of this profligacy threatens abject poverty for billions of
people. Therefore, it is little wonder the Fed is unpopular and is seeking to
retrieve its image. What is the reality of offering public access to Fed forecasts?
Is it genuine transparency or is it done to add further weight to negative
interest rates as a means of forcing consumers to spend rather than save?
In the past,
the Fed has proved far from accurate in its economic forecasting. Indeed,
former Fed Chairman Greenspan utterly failed to see the collapse of housing,
banking and stock markets, all of which had been accurately forecasted by
many others. Prudent investors are wary of Fed economic forecasts and give
them guarded weight.
Furthermore,
there is a distinct danger that investors may fail to appreciate the
political forces which drive the Fed sometimes to act contrary to its
economic forecasts. For example, while acknowledging privately that the
economy can not be jump started, the Fed
nevertheless presses Americans to spend when they should be saving and to
hold depreciating paper dollars when they should be storing their wealth in
precious metals.
It is widely
known that the Fed uses its policy tools and public proclamations in order to
influence the U.S. Treasury market. It is far less understood how its moves
are equally directed at the stock market. From my perspective, it appears
that the Fed have unstated policy directives to keep the Dow Jones index
above 10,000. At the same time it seems it has striven mightily to keep the
price of gold from rising too fast. The markets are not free, but the Fed
talks as if they were.
The Fed's
negative interest rate policy forces yield-starved investors into the equity
market. Not content with offering negative real interest rates as a means of
forcing people to accept greater risks against their better judgment, it
appears that the Fed intends now to use its economic forecasts as added
inducement. It is hard to see this as a legitimate activity for a central bank, least of all the world's most powerful.
Prudent
investors are becoming wary. Already, many have lost faith in home ownership
as a store of wealth and prefer to rent. Evidence indicates a growing
distrust of equity markets as a source of capital enhancement. If inflation
becomes undeniably virulent, as some forecast it will be later this or next
year, the Fed's carefully constructed models will be completely discredited.
Investors' holdings of U.S. Treasuries or U.S. stocks, who had been convinced
of the Fed's forecasts, stand to be crushed.
Precious
metals offer one way out. However, the Government, the Fed and mainline media
do all in their power to distort and discredit such investments.
John
Browne
Euro Pacific Capital, Inc.
John Browne is a former member of the UK
Parliament and a current senior market strategist for Euro Pacific Capital. Click here to learn more about Euro
Pacific's gold & silver investment options. For a great primer on
economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes
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