One current and three former members of the American branch of The Committee to Destroy the World – otherwise known as the Federal Reserve – met last week in a public forum to discuss their work.
What I learned is this: Central bankers' wholesale destruction of capital will not only continue, but in fact accelerate in the weeks and months ahead.
Here's what the Fed said, and why I'm not at all happy with it…
"Helicopter Ben" Makes a Return Appearance
The epitome of the cluelessness and arrogance that reigns in the halls of the Marriner S. Eccles Building in Washington, D.C. was without question the comments by former Fed Chairman Ben Bernanke bragging about all of the money that the Fed had earned in its QE program that was sent over to the U.S. Treasury. (Among other things, he neglected to mention that the end of QE means that these funds will no longer be available to reduce the U.S. budget deficit, which is going to explode over the next few years.)
Mr. Bernanke was the architect of the brilliant plan to push investors to take greater risks by reducing nominal interest rates to zero and real (inflation-adjusted) rates to below zero.
This policy left the United States buried in debt that suffocates economic growth, widens wealth inequality, and sets the country on course for another crisis.
Conditions are even worse in Europe, Japan and China where their central banks enthusiastically copied Mr. Bernanke's prescription for "growth."
The world would have been better off had Dr. Kervorkian been in charge.
A close friend of mine, who is also a legendary hedge fund manager, keeps saying that the stock market is not going to rise if interest rates stay low because low rates mean that the economy is weak.
He is focused on the 10-year Treasury yield, which finished last week well below 2% at 1.72%.
But the fact that this yield dwarfs those in much of the rest of the world, where interest rates going out as far as 10 years are negative in Japan and parts of Europe and approaching zero in Europe's strongest economy, Germany (0.10%), is a frightening proposition.
Unfortunately, investors are not frightened but instead greet these low interest rates as an invitation to commit hari-kari with their money. The sooner they figure out what The Committee to Destroy the World is doing – trying to solve a debt crisis by creating trillions of dollars of more debt – the better off they will be.
The Markets Aren't Falling for This One, Though
While the Fed keeps making noises that it will raise interest rates several times this year, the markets are pricing in much lower odds of policy awakening from its slumber.
While 75% of the economists (who are always the first to speak and the last to know) polled by the Wall Street Journal last week expect a June hike, the federal funds futures market puts the chances of the Fed moving at only 16% by June and 50% by December.
Yet while the funds markets seems to be losing faith in the Fed, the stock market remains in its thrall. Every time "Mother Janet" promises to go slow, stocks move higher. If you want to jump off a cliff, why not make sure the cliff is as high as possible to inflict the most damage when you hit the ground?
The Fed has covertly added two new mandates to its twin statutory mandates of containing inflation and promoting full employment.
Its third mandate is worrying about weak foreign economies and its fourth mandate is to make sure the stock market never goes down. While it denies the fourth mandate (a denial that should be taken with a grain of salt), it is increasingly open about the third.
Mother Janet and her colleagues repeatedly cite weak foreign economies as the reason why they are holding off raising rates more aggressively.
These new mandates are the monetary equivalent of liberal judges legislating from the bench. They have resulted in the aggressive expansion of the Fed's power and corrupted monetary policy.
The Fed has far more power today than it did before the financial crisis. Some of this power was deliberately granted by Congress under Dodd-Frank to deal with the financial crisis, but much of this power was usurped by the Fed expanding its mandate without Congressional approval.
The Fed is a complex institution that works in mysterious ways, but if Americans and their representatives don't come to better understand that it is destroying their money and the economy, the consequences are going to be catastrophic.
Why Volatility Is Coming Back
Last week the stock market experienced a pop in volatility. Often, higher volatility signals a shift from one type of market to another.
In this case, it may indicate that the market rally is coming to an end and the bear market will resume. In view of the fact that S&P earnings are expected to drop 8-9% in the first quarter (and earnings calculated without fraudulent "pro forma adjustments" will drop even more), first quarter GDP was likely around 1%, Japan's economy is back in recession and China is a house of cards, there are plenty of reasons to question why stocks should move higher.
Last week, the Dow Jones Industrial Average lost 1.2% or 216 points to close at 17,576.96 while the S&P 500 fell 25 points or 1.2% to 2047.60. The Nasdaq Composite Index fell 1.3% to 4850.69. The S&P 500 is now flat on the year, which is a victory in itself considering that it opened the year down 5% in January.
But the market's recovery appears to be based on expectations that the Fed will move very slowly this year while foreign central banks keep lowering rates below zero, again demonstrating that investors are slaves to the Committee to Destroy the World.
This is a decidedly unhealthy regime that will lead to the resumption of the bear market and, sooner or later, another financial crisis.
There is good reason why gold and gold mining stocks, which I recommended at the beginning of the year, are among the best performers year-to-date.
Investors are realizing that they need to protect themselves from the public officials who cling to outmoded economic theories in setting policy.
Their policies are destroying the value of paper money. The gold rally is in its early stages. Investors should partake and save themselves.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.