Anybody who thought the Fed would raise interest rates in September (for only the second time in 10 years) less than two months before a tight presidential election between two unelectables probably thinks the Clinton Foundation is a charity or that Donald Trump pays taxes.
The Fed's intellectual deficit is only exceeded by its lack of political and moral courage. Even JPMorgan Chase's Chief Economist David Kelly, an establishment figure, told CNBC that the Fed is "doing long-term harm to the economy by not hiking interest rates... the economy has hit every target they have set. And we've got an inappropriate level of interest rates which is distorting asset markets, blowing bubbles, and will eventually end up in inflation. They're imposing long-term harm for no short-term good here."
Naturally, the Fed doesn't see it that way. Janet Yellen, in one of the lamest excuses for inaction in Fed history, said, "We judged that the case for an increase had strengthened but decided for the time being to wait for continued progress toward our objectives."
If that isn't pathetic, I don't know what is. But it wasn't as ridiculous as what came next...
The Markets Love This Fed's Poison
I was almost too depressed to be outraged by the market's reaction to this inanity or the nonsense written about it by the mainstream financial press.
I nearly choked when I saw the CNBC headline lauding the market for celebrating the Fed's failure to act, though I stopped myself after realizing that expecting anything intelligent from the laughingstock of financial media is just inflicting torture on myself.
While the Fed and its apologists engaged in some empty talk about a December rate hike, to quote Hillary Clinton at the Benghazi hearings - "what difference does it make?"
The fact that the Fed is hemming and hawing about raising rates by a miniscule 25 basis points for only the second time in 10 years is proof positive that it not only has no clue what it is doing, but that everything it has done over the previous decades has been destructive to economic growth.
People used to laugh at Ron Paul for demanding that we audit the Fed and then shut it down. Hell, I used to laugh at him.
Now I think he had a point.
They're Using 100-Year-Old Economic Theory on a 21st Century Economy
Leaving aside the fact that the Fed's stated inflation and employment objectives have been met, as Mr. Kelly pointed out, the real problem is that the Fed doesn't understand these objectives.
Trapped inside the intellectual vacuum of traditional economics, our central bankers still believe inflation is too low while clinging to outdated employment models. It is joined in these errors by the mainstream financial press.
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Without exception, every article in The Wall Street Journal discussing the topic refers to inflation being too low, completely ignoring the runaway inflation in financial asset prices and the steady inflation in the prices of many goods and services (except energy prices).
There is literally zero chance that the global economy will improve until the veil of ignorance promulgated by consensus thinking is overthrown.
The policies resulting from this willful ignorance (willful because it ignores an immense body of of contrary evidence, ignorance because the evidence shows the thinking to be wrong) are burying the world under too much debt while destroying the value of money.
It may appear that investors are escaping the harsh judgment of markets, but it only appears that way.
Naturally, markets enjoyed the fact that the Fed will remain feckless for longer.
The Markets' Gains Might Not Last Much Longer, Though
The Dow Jones Industrial Average rose 138 points, or 0.8%, last week to 18,261.45, while the S&P 500 added 25 points, or 1.2%, to 2,164.90. The Nasdaq Composite Index also rose by 1.2% to 5,305.75, despite news that one of its larger components, Facebook Inc. (Nasdaq: FB), had been misreporting ad revenue for the last two years.
The market does not appear to be taking the prospect of a Trump victory seriously, but it should. The momentum in the race is shifting in the Republican's favor. With increasing evidence that the system is rigged, the electorate seems more willing than ever to take a chance on a man who is willing to speak truth to power and challenge the establishment despite his many obvious flaws.
Many pundits argue that the market has been priced for a Hillary Clinton victory. That could lead to significant market volatility if the assumptions of the mainstream media of a Clinton victory are challenged further. With the S&P 500 trading at its highest level other than 1929 and 2000 (based on the Shiller Cyclically-Adjusted P/E) and other measures, it is vulnerable to any serious disruption of the narrative that has driven it to near record highs.
That narrative has two main parts - an easy Fed and a victory by a status quo candidate. The easy Fed is in the bag, but the status quo could be rocked.
It would be prudent to be cautious with your investments until greater certainty emerges.
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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.