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Fed Easing Responsible for High Markets?

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March 06, 2013 – Comments (0)

Board: Macro Economics

Author: notehound

Well, that is the question, I don't know as much as I would like about how critical the Fed's easing is to the market right now. Obviuously it's important.

EconWatcher,

Every investor has to decide for himself or herself exactly how critical the Fed’s easing is to the market.

I have a very strong belief that, with its unlimited free money from thin air, the Fed has completely displaced, distorted and destroyed the price discovery mechanism of the markets (especially the risk assessment, valuation and rate-setting mechanisms) with regard to numerous asset classes, including Treasury bonds, mortgages, real estate, corporate debt and equities. There is essentially no investment asset class that the Fed’s massive, unprecedented, relentless and unlimited intervention has not disrupted.

My thesis is that it is presently impossible to determine an objective value for anything because the entire pricing mechanism is broken. Two of the most essential methods for pricing and valuing investments are essentially irrelevant at this point: 1) the risk premium, and 2) the time-value of money (interest).

Legendary investor Stanley Druckenmiller had this to say today on CNBC (a/k/a “bubblevision”):

"It's one thing to control short-term interest rates… It's another thing when you're taking 75 to 80 percent of the bond supply and holding that price down. … This is a big, big gamble to be manipulating the most important price in free markets, [interest rates]…that ends one of only two ways, a mal-investment bust (as we saw in 2007-8) or full debt monetization and "off we go into inflation."

This is what Druckenmiller had to say about stock prices:

...[Stocks:] "They're great value only relative to zero interest rates. They're not great value on an absolute basis… He went on to suggest that stocks could continue to rise in the near term…. “The party can continue for a while… I don’t know when it’s going to end, but my guess is it’s going to end very badly."

For the entire video discussion, you can click the following link: http://www.cnbc.com/id/100522303

He added a word of caution for investors only just being drawn into the markets after years of holding back: “If you’re going to play… for God’s sake play in liquid instruments.”

http://blogs.marketwatch.com/thetell/2013/03/05/druckenmille...

Consistent with my thesis above, Druckenmiller included comments precisely about my concerns:

"... if you print enough money, everything is subsidized - bonds, stocks, real estate." He dismissed the notion of any sell-off in bonds because the Fed is buying $85 Billion per month (75-80% all off Treasury issuance). “The Fed has cancelled all market signals and just as we did in the 1970s, we will find out about all the mal-investments sooner or later."

"It's one thing to control short-term interest rates… It's another thing when you're taking 75 to 80 percent of the bond supply and holding that price down. … This is a big, big gamble to be manipulating the most important price in free markets, [interest rates]…that ends one of only two ways, a mal-investment bust (as we saw in 2007-8) or full debt monetization and "off we go into inflation."


See also: http://www.zerohedge.com/news/2013-03-05/druckenmiller-when-...

Finally, the following Comment from an anonymous blog member lays out succinctly the problem with valuing anything (including the value of time itself) under the Fed’s present unlimited, effectively eternal, quantitative easing.

...Interest rates are the price of time, everyone's most precious commodity. They naturally rise and fall along with general social stability. If it's lost any significance, it's due to the fact that money is no longer a "thing" (thus lacking the limits of natural scarcity).

[Murray] Rothbard laid out the entire system where ALL rates of return tend to approach the rate of interest, due to money being fungible, as well as the fact that debt and equity paper issued by a company are basically analogous, from a ROI perspective.

So yes, in a real capitalist economy, interest rates are the most important price discovery mechanism, as they form the base of production determining all others.


-Comment No. 3301961 from "NotApplicable"

http://www.zerohedge.com/news/2013-03-05/druckenmiller-when-...


-Hound (still buying and trading - relying on the "bigger fool" theory at this point)

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