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March 25, 2014

There is a saying around that goes like this: “You can’t fight the Fed.” The prevailing thought is that the Fed controls the economy and if they want to be accommodative then markets respond. Said another way, don’t short when the Fed is long, or don’t bet interest rates will normalize when the Fed has decided to artificially keep them low. You will lose if you bet against the world currency printing machine. I recognize this and have made very similar warnings, but I have also figured that the Federal Reserve’s control may be well worth shorting itself. The Fed, in my opinion, can have market impacts, but they are short-term impacts and the real consequences of market forces may very well be substantially worse as a result of the Fed’s manipulation.

What seems most interesting to me is that this infatuation with every move the Fed makes is a relatively recent development in economic forces. Formerly, trust of the financial systems rested in the resilience of the free markets to correct and respond to market boom and bust cycles. History proved that human nature was to pile on during a boom until which time the inevitable bust “cleansed” the poor financial and business practices and policies that grew out of a boom cycle. The Fed has proved that the cleansing process is no longer necessary in our ‘free market’ economy. Our central bankers are the great wizards of Wall Street, but, do we have faith that the Oz of Wall Street really has all the dials so finely tuned that they are able to keep the economy perfectly harmonized? Apparently many of us do and all my doubts have been misguided!

It has been nearly one year since I predicted the beginning of a new economic event in April 2014. While this prediction was somewhat ‘tongue in cheek,’ it wasn’t completely so. I am surprised that the markets continue to rise and the dollar has not begun to collapse under all the weight of massive money printing. While it’s not yet April, there is absolutely no sign of the financial markets giving up the ghost. Even my hunch of an event anytime in 2014 would appear dubious at this point. So here may be the best news you’ve heard from me: if April comes and goes without any type of economic event, your economic contrarian will be taking a break from his uplifting blogging!!!

Is that Ms. Yellen?


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