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What is the Fed really telling us?



December 10, 2009 – Comments (3) | RELATED TICKERS: GOOGL

There are a lot of things that we could say about the Federal Reserve's policies over the past couple of years. Much of them are subject to opinion and conjecture as it's tough to really know how things will pan out in future years -- and even then there will be plenty of debate over whether success (or failure) of the Fed's policies led to the good times (or horrible times) in the economy.

But there is one thing we can pretty much say for sure, and that is that by knocking down rates, the Fed is making low risk assets like U.S. Treasuries very unattractive and is pushing investors towards riskier assets. While acronyms like CDO, CDS, and MBS might come to mind when you think risk, that category also includes stocks. So, yes, the Fed is basically telling us to buy stocks.

Today on I addressed the fact that even though stocks carrying high valuations today -- such as Google and CME Group -- look attractive compared to the kind of returns you can get on safer assets, that's no excuse to get lazy and let the Fed's policies lead you into unnecessarily risky investments.


3 Comments – Post Your Own

#1) On December 10, 2009 at 10:13 PM, rd80 (94.78) wrote:

Agree that the Fed is making Treasuries unattractive for investors, but not for banks.

Near zero short term rates combined with a huge supply of gov't paper, and pressure from regulators to strengthen balance sheets encourages banks to lever up and slide a little way out the yield curve.  They capture small, but near risk free income on the spread (as long as the Fed doesn't raise rates) and regulators are happy to see risk-free assets on the balance sheets.

You and I can't borrow at zero, so the trade doesn't make sense for us.  But it makes sense for banks and those that can lever up at virtually no cost. 

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#2) On December 10, 2009 at 10:27 PM, russiangambit (28.67) wrote:

It is true FED is pushing everybody into risky assets. But they are called risky for a reason. Are you paid enough for the risk? I don't think so. Mispricing of the risk is what got us into trouble in the first place. How quickly we forget.

As I said before, FED will not be able to blame everything on the "greedy banks" next time. Their are policies are too blutant and obvious this time around.

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#3) On December 11, 2009 at 8:28 AM, cthomas1017 (98.75) wrote:

russian, I'm not so optimistic as you about future blame.  There is an ignorant portion in American society that will want to blame someone, and they would loathe the idea of pointing the finger at the teat from which they suckle.

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