“To find the truth, watch what people actually do;
not simply what they say they will do.”

 

After a record 81 months and counting of zero interest rate policies (ZIRP) here in the United States, and effectively everywhere else now on the planet, it’s time to turn off the Fed Watchers on CNBC and Bloomberg TV. It’s time to stop reading about the Fed’s probable liftoff date for interest rates somewhere in the near future. Don’t be fooled by the academic wonks preaching about the Fed’s finely ‘word-smith-ed’ written announcement last week and how Chairman Yellen is still prudently in control through the country’s central planning operation back in Washington.

If you are still listening to the Fed and their market pundits blather about their outlook on the economy and coming ‘normalization’ of US interest rates, I suggest you re-watch the scene from the 1939 classic movie when Dorothy and friends finally meet the ‘all-mighty and all-powerful’ Wizard of Oz in person in Emerald City.

As you might remember, even Toto wasn’t impressed.

Mr. Market – also known as the US stock market, and the correlated risk markets of private equity, venture capital, high yield debt, commodity, energy, and international stocks – is already figuring out and pricing in the dangerous reality:

The Emperor Fed has no clothes, and it no longer really matters what they do or what they say. The Fed is not simply in any ordinary box, as they say, they are in their own casket fast sealing their own fate to the eventual end of US central banking as we’ve known it since it was created nearly 103 years ago.

Ron Paul may not need to end the Fed. Mr. Market may very well do it for him in the short years ahead.

The fragile world economy is addicted to free money as much as the world’s fragile over-levered sovereign nations are addicted to funding their massive deficits through low interest rates. Any change to a ‘normalization’ of past history’s interest rate levels, even a relatively small change, is deemed too dangerous by the central planners and likely to be the pin-prick that pops today’s massive global financial bubble.

The financial markets are just beginning to concur, but there is still a long way to go.

 

Up until now, the losers of this historic era of free money have been the savers – including the elderly and retirees who primarily have lived on their fixed income investments, only to see their incomes fall by two-thirds or more in just the last decade. While their incomes have cratered, their cost of living and cost of healthcare has skyrocketed at the same time creating the perfect storm.

However, and very importantly, the institutional losers have also included the insurance companies and the private and public pension funds – investors that have been forced to take on more and more market risk as minuscule bond yields have made it impossible to fund their future liability streams. They too are now increasingly underfunded and exposed to catastrophic losses should/when the next major stock market bust unfolds.

 


In the end, the Fed’s actions, or inaction in this case, speak volumes to the real story ahead for the world’s economy and financial markets. We are now at a point in time of extreme vulnerability as we near the end of a 35-year credit boom super cycle. Perpetual zero interest rates, unprecedented central bank money-printing, and nearly $19 trillion of federal government borrowing and spend, has greatly inflated Wall Street financial markets while primarily draining Main Street pocketbooks.

As global public sector debt, global unfunded liabilities and government safety-net dependency continues to expand exponentially, global growth is slowing and currency wars are in full bloom; a precarious economic ‘cocktail’ that threatens the onset of the next major economic recession.

Currency wars are clearly underway around the globe, as stagnant local economies spur domestic regulators to slash short-term rates to the bone in a last gasp effort to ‘export’ their way to prosperity. The problem lies when everyone is attempting to do the same thing, all at the same time.

It could be said that unless the world finds another planet in our solar system to export to, we are all indeed in serious trouble.

As global stock markets, and soon global bond markets, begin to collapse and interest rates rise throughout the advanced economies as well as the emerging markets, there is no longer a ‘Fed-In-Shining Armor’ to come to our rescue anymore. Their quietly discussed ‘negative interest rate’ scheme will only further expedite the global currency collapse underway and hasten sovereign debt insolvency through credit quality deterioration.

As was former Fed Chair Greenspan’s pre-Technology Market Bust rhetoric of a ‘New Paradigm’ in 1999, or former Fed Chair Bernanke’s pre-Housing Market Bust rhetoric of subprime mortgage ‘containment’ in 2007, today’s Federal Reserve is speaking volumes of what is to come for the global economy.

Their silence is deafening.
Kirk D. Bostrom
Chief Portfolio Manager
Strategic Preservation Partners LP

http://sppfund.com

Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.