About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Saturday, May 28, 2005

Federal Reserve In The Real World

The Country needs a good five cents cigar. But even more, It needs a good five cent nickel. The roles of the Fed and the Treasury are to provide and maintain sound money. But the Fed Chair and the Treasury are there to serve the President, not the other way around. When sound money must confront realpolitik and its agenda, sound money is going to lose at least nine times out of ten. The Fed Chairman is necessarily a political operative and when the political agenda challenges sound money, it is his job to sand bag as he can and try to minimize the damage. There is no room for an adolescent hissy fit and resignation. Do that and you will not eat lunch in D.C. again.

Volcker, an anti-inflation and globalist fanatic, got in the way of a sensible political agenda and lost his job. Greenspan has been very different. A better politician, he learned to get out front of the Clinton agenda and lead it. Both Chairs made big, costly mistakes.

The internet is crammed full of the commentary of sound money advocates. Well and good, although the preachy sanctimony of most of these commentaries is an irritant. As an investor, I have always looked at the Fed as operating in a political maelstrom and have tried to figure what They are likely to do first and what, from a value judgment perspective, They should do second. You should too, because if you do, you will better understand the continuing situation on the ground.

Lately, Greenspan is under the glare of questions about whether the current level of short term rates is appropriate. The sound money gurus worry rates are too low. The growth advocates worry rates may be too high.

With 3% inflation, the Fed Funds rate should be 4.25 - 4.50%. But the Fed has been concerned with nursing the large US manufacturing and related industrial and commercial products and services sector back up from near oblivion. Nearly five million jobs have been lost here. From the prior peak (6 / 2000) to trough (2 / 2002), factory shipments fell nearly 20%, the largest decline since The Great Depression. Sales then languished until mid-2003, and it was not until early this year that shipments finally exceeded the 2000 peak level.

Easy money in recent years has triggered a housing boom and sharp growth in consumer spending. Have excesses been created? Likely so, but the policy pulled the industrial / commercial sector out of a deep nosedive which was its intent (including, perhaps, a planned assist from the war in Iraq).

Now, with the industrial sector back on its feet, the Fed has a freer hand to tackle other issues. More on the new game plan will come in future posts.

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