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This is Seriously Funny!

January 18, 2013

Fed Concerned About Overheated Markets Amid Record Bond Buys

Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.

Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008. Enthusiasm for speculative-grade bonds is at unprecedented levels, driving a Credit Suisse index that tracks the yield on more than 1,500 issues to a record-low 5.9 percent last week.

Now, as central bankers boost their stimulus with additional bond purchases, policy makers from Chairman Ben S. Bernanke to Kansas City Fed President Esther George are on the lookout for financial distortions that may reverse abruptly when the Fed stops adding to its portfolio and eventually shrinks it.

“Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels,” George said in a speech last week. “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.”

I only have one response to Mr. Fed. Your concerns are too late! In October 2012 I referenced this very issue, which is a repeat of warnings I have made previously.

The Fed is responsible for creating these “market distortions” — isn’t it special that they are now trying to warn us about them?

Let me rewrite this article in one run-on compound sentence: The Fed is seeing that they have created the mother of all bubbles and that this will not turn out well, so they figure that if they warn about the impending doom they will be able to say, “We warned you!” and duck responsibility.

Here’s another quote from the article:

“There is no pulling back a little,” [Drew Matus, senior U.S. economist] said. When the Fed begins to shrink its portfolio, investors will start to price in the entire stock of bonds coming back into the market. “It is always going to be hard to disengage in a very gradual manner.”

Now let me paint you an image. Ben Bernanke is holding a fire hose, and on the end of that fire hose he has a regular balloon with the water turned up full-blast, and the balloon is stretched to the max. Now he realizes that if he continues to let the water run, the balloon will soon burst. But in his other hand, he has a sewing needle, and he’s trying to figure out how to prick this balloon and let the water slowly drain. My answer to this is that it is IMPOSSIBLE.


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