Is the Fed Sustaining Bubbles? How I'm Planning Ahead

Includes: DBA, GLD
by: Bo Peng

If you have any lingering doubts regarding the Fed's bias towards sustaining bubbles and being late on fighting inflation, the latest release of the 2005 Fed meeting minutes should help you see more clearly.

There's some good humor and cynicism here which certainly deserves respect. It's also obvious that many Fed officials and economists, including Greenspan and Geithner, had by 2005 at the latest realized the bubble in housing and the systemic risks posed by big banks (and Lehman and Bear Stearns in particular). Impressive foresight.

But the good news stops there. Were the bubble and risks just a joke to them? They saw it quite well, had some good laughs and proceeded to do nothing.

When Bernanke said that it takes 15 minutes to raise rates, he was being too modest. The final tally to vote on the decision, I'm sure, takes at most one minute. But this is an insult to the questioner and the audience, isn't it? The real question is how long it will take between inflation rising and them seeing it, then making the decision to act on it, then actually taming inflation. Instead of providing an honest assessment, Bernanke pulled a Clinton "what-is-is" on us.

I'll be waiting anxiously in 2013 to see the release of 2008 meetings, but even more so of their 2011 meetings. I expect them to see very clearly, with their impressive intellect and good sense of humor, the evidence of inflation in everything except housing, growing bubbles in commodities and stocks, economic polarization both domestically and globally, etc etc, then make some jokes about it, have some good hearty laughs and do nothing.

There's so much money in the system it's scary. Non-real, hot money looking for real return. Everybody knowing anything about the market knows this. The Fed, of course, knows this well. Every bubble-bust cycle creates some winners and losers, but one definite loser is the vast majority of the middle class, who have little chance of benefiting meaningfully in the bubble phase and are inevitably hurt in the bust phase. Every bubble-bust cycle knocks a portion of the middle class a few steps down the economic ladder while minting some super-rich. The Fed, of course, knows this well. I'm sure there's a joke there somewhere. They'll laugh about it, and do nothing.

I don't know when or how the bubble will go bust. But here's my plan:

  1. In the short term, I try to resist the urge to short stocks. Lots of money still need to get into position, e.g., the hot money that got pushed out from emerging markets.
  2. Someday, somebody will finish positioning and will call WSJ/CNBC/Bloomberg; the world will be horrified to find out there's a crisis all of a sudden. I'll be deep in that trade.
  3. I'll accumulate some gold (e.g. GLD) and agricultural commodities (e.g. DBA) from pullbacks. These may not necessarily do well during the bust phase, depending on the nature of the excuses and the scope. But they will do well in the inevitable inflation flare-up.

No matter how confident Bernanke is about his ability to fight inflation in time, I'm exactly as confident that he'll be too late. In fact, inflation is already here. Nah, just kidding.

Disclosure: I am long GLD, DBA.