Contrarian Chronicles
Low rates are the problem, not the cure
Cheap money is why the dollar is falling, precious metals are rising and homebuyers are in danger. The longer the Fed waits, the worse the damage.
By Bill Fleckenstein
As I have said for nearly two years, I think owning precious metals is a way to protect yourself from the problems the Fed has created and exacerbated. So, I was pleasantly surprised last week when I found the New York Times has come to the same conclusion. In an editorial "The Cost of Cheap Money,” the Gray Lady of Times Square noted that (surprise, surprise) there is such a thing as too much of a good thing. Better, the editorial pointed out the problems that arise when the central bank wants to spike the punch bowl vs. remove it:
"Mr. Greenspan should heed the lessons of the stock market bubble of the late 1990's. In the new economy, remember, we were assured that the old speed limits needn't apply. What investors were not warned about enough was the extent to which the virtuous cycle of cheap money, low inflation and strong growth was feeding a speculative financial market bubble, which eventually popped at huge cost to those investors."
-- and, I might add, to job holders and future job seekers.
The Times sees a housing bubble, too
The editorial then cites a potential bubble forming in the housing market (more about housing below), suggesting the Fed consider that wildly unpopular action I have noted for a long time, which is to raise rates: "The Fed should gradually wean the country off such extraordinarily easy money before it is forced to do so abruptly, and painfully. It cannot wait until after the election, nor until it sees inflation pick up. Rates are so low that the Fed has plenty of room to move before being accused of adopting a restrictive monetary policy. It needs to get started."
But alas, though The New York Times urged the Fed to act like an adult, it appears not to understand that such behavior is beyond the Fed, whose irresponsibility has only succeeded in postponing the pain and ensuring a much greater wipeout once these bubbles start to burst. Yes, the Fed should raise rates and get it over with. It should stop subsidizing people who spend recklessly at the expense of people willing to save. (The Fed’s Federal Funds rate is 1% and has been at that level since June 25, 2003. Rates on 30-year fixed mortgages are 5.5% and lower.)
Having said all that, reading the minutes from the January Federal Open Market Committee meeting released late Thursday, I was stunned to see that more than one unnamed Fed head appears to be having second thoughts about all this easy money. As the minutes state: "A number of members commented that expectations of sustained policy accommodation appeared to have contributed to valuations in financial markets that left little room for downside risks, and the change in wording might prompt those markets to adjust more appropriately to changing economic circumstances in the future."
But moving rates higher now is not something Easy Al is going to do. Mr. Market will deal with the chairman and the economy in his own sweet time. Regrettably, that process will involve a tremendous amount of pain, thanks to the wanton recklessness of the Fed.
The dangerous loans being made to sell houses
The March 16 edition of The Wall Street Journal carried one of the best stories I've read there in quite some time: "Creative Mortgages Fuel Home Sales." Writer Ruth Simon did a pretty fine job of discussing many of what I deem questionable practices in real-estate lending. This is why I sold my shares in Annaly Mortgage (NLY, news, msgs), as I mentioned in last week's Contrarian. I am worried that the value of loans collateralized by real estate will become impaired going forward.
I do not want to be lending to that market in any way, shape or form. The level of transparency isn't that great, and when I look at all the things going on, coupled with the leverage at Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and the Federal Home Loan Banks, this looks to me to be a recipe for disaster. I fully expect that the debt backed by those three organizations will be bailed out by the federal government, but, at some point between here and there, I expect things to get messy. |
