On Tuesday, January 5th, former Dallas Federal Reserve President Richard Fisher appeared on CNBC, and the admissions he made were both refreshing and shocking. Fisher’s candor was the best CNBC footage since Jim Cramer’s 2007 on-air meltdown. Fisher admitted that the artificial gains in the stock market can be attributed to quantitative easing and 0% interest rates. “We frontloaded a tremendous market rally,” Fisher said proudly. This was a rare piece of truth coming from a former member of an organization that typically lies with impunity.
Fisher’s statements left his CNBC interviewers surprised, especially his comments about the “overpriced” stock market. Fisher tried to defend himself saying he didn’t vote for QE3, but that’s like Rob Schneider saying he didn’t make a third Deuce Bigalow movie. As anyone who has seen Male/European Gigolo can attest, the damage had already been done. Like Bernanke, Fisher rode off into the sunset and will not be blamed for the economic devastation that lies ahead. He now works for Barclays, and he serves on the boards of PepsiCo and AT&T.
The main takeaway from Richard Fisher’s ten year term with the Fed is that even he could not resist the temptation to tinker with the U.S. monetary system. In February 2015, Steve Matthews wrote, “As an interest-rate setter, Fisher has been an überhawk, the kind of policymaker who worries about inflation and asset-price bubbles even when neither is evident. That concern guided his consistent calls—and dissents at the Federal Open Market Committee—for a withdrawal of Fed stimulus as soon as possible.” It’s sad when even the ‘überhawk’ thinks QE is perfectly fine.
I covered the Fisher interview, along with many other topics, in episode 37 of Kennedy Financial, so please check it out if you would like to learn more.
I saw The Big Short the day after Christmas, and I can say without reservation that it’s the best film I’ve seen in awhile. The story is accurate, the acting is superb and complicated financial information is explained so even your grandmother could understand it. If I had to come up with a single complaint, I’d say the film didn’t blame the Federal Reserve for the housing bubble. But Michael Lewis didn’t suggest that in his book either.
I went to the 10am matinee at a local cinema, so I joined only two other people in the movie theater. I found myself gesticulating at the movie screen several times since the environment felt like my own private viewing. I wasn’t expressing outrage over what has happened in the past because we already know how artificially low interest rates, no income/no job (ninja) loans and fraudulent appraisals wrecked the U.S. housing market. What infuriates me is that we are doing all of the same things again!
The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or Flop. Interest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel. Armando Montelongo is back on infomercials and he is ready to teach you how to become a house flipping millionaire just like him! And I still hear people saying that buying a house is a “good investment.” As Mark Baum (played by Steve Carell) says in the film, “We live in an era of fraud.”
The fraud continues today, and there is no one with the courage to stop it. Since the housing bubble, our public servants have become feckless matadors allowing bulls of deceit to distort our financial markets with impunity. Former Attorney General Eric Holder admitted as much in 2013 stating, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” Holder now works for Covington & Burling where he earns millions defending Wall Street firms.
Michael Blurry, played by Christian Bale in the film, now says that another crisis is looming thanks to the Federal Reserve’s money printing and ZIRP. You don’t have to be a billionaire genius to know that, but his statements surely lends credibility to those of us who have been saying this for some time now. The truth is that America has not learned its lesson, so we are commencing another financial crisis worse than 2008. The collapse will gain momentum in 2016, and the worst of it should be revealed no later than 2018. By the end of this decade, Michael Lewis will need to write another book, but hopefully he will get the real culprit right this time.
After the failure to launch in September, I took to Twitter to challenge Fed faithful and Peter Schiff naysayer Scott Nations. Schiff and Nations got into a heated argument in July over whether the Fed would raise interest rates in 2015. Nations found it absurd that Schiff could suggest that not only would the Fed not raise rates, but QE4 was still on the table. Nations asserted that Schiff made “outlandish predictions.”
I reminded Nations that viewers like me had not forgotten what he said, and there would be no rate hike in 2015. To prove my certainty, I bet him one ounce American Silver Eagle. Nations, not understanding the value of real money, agreed instead to make a $50 donation to the winner’s favorite charity. Naturally, I selected a 501(c)(3) called the Ludwig Von Mises Institute.
When December arrived, the Fed shocked me by actually doing the right thing for the first time in nine years and raising the funds rate a quarter point. But Janet Yellen instructed the public “I think it’s important not to overblow the significance of this first move. It’s only 25 basis points. Monetary policy remains accommodative.” Although I lost my public Twitter battle with Nations, it became clear that the Fed and Yellen were not proud or confident in their first step.
With the dawn of 2016, the Fed will need to add more rate hikes to prove that the U.S. economy can withdraw from its long-term artificial monetary stimulus. I believe that after such a prolonged binge on this financial heroine that our zombie financial markets will come crashing back down to Earth before ever reaching their destination. Like the Challenger space shuttle tragedy, the liftoff for Yellen and the Fed may have received applause and awe, but these sentiments will be turning to shock when their monetary policy blows up in mid-flight.
It takes character to admit when one is wrong, and I am happy to do that here. Now that the Fed has finally made a move, the world will get to witness the full consequence of Keynesian monetary policy. By the Fed’s second or third meeting of 2016, it should be clear that the U.S. economy can’t handle increasing rates anymore than the Challenger could handle frozen O-rings. My $50 bet with Scott Nations was a small price to pay for admission to this upcoming spectacle.
Tomorrow at 2pm, the Fed could announce that interest rates will be raised for the first time in almost seven years. Steve Liesman, a CNBC correspondent known for praising for the Fed, published an article this morning stating, “For the first time in the five-year history of the CNBC Fed Survey, a plurality of respondents forecast that the central bank will raise rates at the current meeting.”
I’ll put my name on it. The Fed will not raise interest rates tomorrow or ever without pricking the world’s largest financial bubble. So what do I know that Steve Liesman and 49% of economists do not? First, I know that our government officials always make the wrong decision. Raising rates would be the right thing to do because it would finally add discipline to a market that is an economic basket case. Since modern American leaders always take the easy road, we can be sure that Janet Yellin will hold rates at zero.
Secondly, the Fed knows that raising rates tomorrow would send the market into a tailspin, which would immediately require a reversal of the meager increase at the next meeting. This would only serve to reduce the Fed’s already minuscule credibility, especially when it would be forced to immediately announce QE4. Even according to a CNBC poll, most respondents think that a rate hike will come after tomorrow. The greatest error about this poll is not the 37% who think that rates will rise tomorrow, but the survey did not include “QE4 will come first” as an answer option.
So there it is. I put my name on it. Herm Edwards would be proud.