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For over almost five years the Fed has engaged in an experimental policy of quantitative monetary easing that has been unprecedented in scale. Now, the Fed is faced with the daunting task of engineering a climb-down of the US financial system and economy from atop the dizzying heights of a towering mountain of excess liquidity.

This is not going to be easy, at all.

On the one hand, the real economy is still exhibiting extraordinary weakness, and the Fed risks derailing the tepid recovery if the withdrawal of monetary accommodation were to destabilize financial conditions and asset prices.

On the other hand, many Fed officials are cognizant of the risk of repeating the policy errors of 2003-2007. This was a period in which the Fed, which was at that time also dealing with a relatively

Fortunately for Mr. Gross, and all of us that provide commentary on economic and financial affairs, people cannot be prosecuted for malpractice for merely expressing opinions. However, I do believe that ideas have consequences. And, for this reason, I am concerned that the faulty analysis propounded by Mr. Gross in the aforementioned essay (and subsequent follow-up media appearances) could gain currency amongst economic and financial analysts and/or the public at large.

Thus, in my most recent article published on Seeking Alpha entitled "Bill Gross's Dreadful Analysis of America's Wounded Heart," I demonstrated that the central thesis in Mr. Gross's report was clearly wrong on both empirical and conceptual grounds. I strongly encourage

In "Wounded Heart," Gross argues that US Federal Reserve policies such as QE (Quantitative Easing) and ZIRP (Zero Interest Rate Policy) are destroying the "beating heart" of

I am going to describe three possible macroeconomic and financial scenarios:

1. Pollyanna Scenario: Rate normalization and restored high growth.

This is the most optimistic of all scenarios. In this case, inflation, real interest rates, nominal bond yields and real GDP will gradually rise to "normal" levels: 2.5%-3.0% inflation, 2.0%-2.5% real yield, 4.5% to 5.5% nominal bond yields on 10Y US Treasuries and 2.5%-3.0% real GDP growth. Note that in this scenario, US real GDP will return to an optimistic long-term trend

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In the present essay I will show why the extraordinary levels of excess liquidity available in the US economy, under current conditions of declining liquidity preferences, could be extremely dangerous to the long-term health of the US economy.

The thesis of this article is that given the current course of events, broad stock market indices such as the S&P 500, Dow Jones Industrials and Nasdaq could very well rise by 30% or

Abelson's Barron's: Its Formative Influence On A Young Man

In the early 1990s, I was a young man dreaming of a career in the investment management industry and I threw myself passionately into learning everything I could about financial markets. In the pre-internet age, for those of us with no access to Wall Street research, perhaps the richest single accessible source of up-to-date financial information and opinion was Barron's weekly magazine.

For a student with no money, Barron's newsstand price of $3.50 could be little daunting. Indeed, to a small-town southern-raised boy that had never even heard of Barron's growing

The present article is about potential developments in the intermediate term time frame, which I define as 0-12 months. Specifically, in this essay, I will argue that many of the requirements for the formation of a liquidity-driven stock market bubble are currently falling into place.

The Story of Excess Liquidity And Normalization of Liquidity Preference

Below I present a chart of a metric

Here is what I believe the Chinese Central bank should do:

A Winning Strategy For China

Traders are hoping and praying that China will step in here and halt the collapse in gold prices. Indeed, many may come to perceive that Chinese purchases may be the only force large enough that can contain the vicious cycle of margin calls, forced liquidations and panic.

What the Chinese Central bank should do is demolish these hopes.

The Chinese Central bank should carefully craft a situation in which a top central bank official is quoted as making

Sorry to say this, but the argument that US banks need to be broken up because their CEOs are "too big to jail" is pure populist demagoguery. Its hogwash!

Let us assume for one moment that Jamie Dimon and all of the other CEOs of the ten largest US banks such as Bank of America (BAC), Citigroup (C), Wells Fargo (WFC),

One group argues that Fed "money printing" through QE is certain to cause inflation.

Another group argues that it is not possible for the US to experience inflation in the context of a "balance sheet recession," with tepid growth, high unemployment and low capacity utilization.

None of these analysts are correct, because they are looking at the wrong things.

In this essay, I am going to explain how the US could, under the right set of circumstances, experience a significant acceleration in inflation.

The Money Printing Myth

I have written extensively on why the Fed's QE policy, will not, in and of itself, cause significant inflation in the US. Therefore, I will not repeat myself at length. However, I will summarize two key points here:

1. Fed policy is not

This question is of fundamental importance, because only a very small fraction of Apple's current market value - about $26.00 per share - can be justified by discounting the cash flows that the company is currently scheduled to distribute to shareholders in the next three years via dividend payments, through the end of 2015. Therefore, to be able to justify Apple's current stock price of roughly $450 per share, we need to have clear vision of how successful AAPL's

So, what are the experts that endlessly repeat this narrative telling us to do right now?

Buy stocks, of course.

Follow The Money

It appears that the latest brilliant investment thesis being promoted in various media by financial commentators

Multiple generations have spun this yarn every which way imaginable. But, in the past few weeks, a veritable swarm of articles has burst onto the scene claiming that the core narrative underlying all such tales is merely an old myth. The "debunkers" are now passionately preaching to anyone who will listen that stock prices do not rise because of money "coming off of the sideline."

In this article we shall explore the truth of this matter.

Warning: Comprehending this may not be easy for some

Let us review where we have stood previously. I was tactically (medium-term) and strategically (long-term) bearish at the beginning of 2012. As detailed in my latest article, the scenarios for Europe that I expected did not transpire, and by late August of 2012, I called off my bear market prediction and suggested a more constructive tactical stance. In my most recent article I explained where I think my tactical S&P 500 forecast through August 2012 went wrong.

For reasons I have detailed elsewhere, I have not changed my view that real (inflation-adjusted) equity market returns in the next 10-20 years will, on the whole, be significantly below historical norms. However, this essay will concentrate on the medium term prospects for US equities and

While the performance of the S&P 500 in 2012 was "middle of the pack" in terms of annual rankings (40th out of 85 years since 1928), this result exceeded the expectations of many analysts, including myself. In this article I will address three questions:

1. What were the causes of S&P 500 performance in 2012?

2. Where did my own forecast go wrong?

3. What would I do differently?

Causes of S&P 500 performance in 2012

The first step in understanding why stocks rallied in 2012, it is essential to understand that the reasons typically cited by bullish pundits at the beginning of 2012 turned out to be completely wrong. Most bullish analysts predicted that stocks would rise in 2012 for reasons such as: 1) Europe's economy would do better than expected; 2) Europe didn't matter much to the US anyway; 3) US

1. How good was the absolute and relative performance of stocks in 2012?

2. Who got it right?

How Good Was 2012?

1. In 2012, the total return of the S&P 500 (including dividends) was 15.83%. Capital appreciation contributed 13.41% while dividends contributed 2.42%.

2. On a total annual return basis, 2012 ranks as the 40th best performance out 85 years since 1928 (the official start date of the S&P index). This places the 2012 annual performance in the 53% percentile rank.

3. Compared to the total return on 10Y Treasury Bonds the total return of the S&P 500 in 2012 ranks 36th out of 85 years since 1928. This equates to a 58% percentile rank.

4. Compared to the total return on T-Bonds, the total return of the S&P 500 in 2012 ranks 33rd out of 85 years since 1928. This

1. Acceleration of QE. The Fed will stop "twisting" - i.e. sale of short-dated Treasuries and buying long-term Treasuries - and double down on QE by engaging in net new Treasury purchases of $45 billion per month.

2. Commitment to reducing unemployment made clearer and stronger. By promising to maintain strong monetary accommodation until unemployment falls below 6.5%, the Fed has made its commitment to reducing unemployment more unambiguous. Reducing this ambiguity plausibly strengthens the effectiveness of the Fed's commitment since financial and economic actors will have no reason to engage in potentially deleterious speculation about the possibility of the Fed prematurely withdrawing monetary support (unless inflation rises above 2.5%).

3. Slightly eased commitment to containing inflation. In past years, the Fed has consistently emphasized that inflation of 2.0% was within its "comfort zone." The Fed has now "fudged"

By way of review, and as most readers undoubtedly are aware, under current US law, Congress must establish a limit or "ceiling" for the amount of funds that the US Treasury is allowed to borrow. By early 2013, the US Treasury will reach the most recently legally established limit and Congress must approve an increase in this ceiling in order for the U.S. Treasury to be able to fund government operations and obligations. In recent weeks, concerns have been mounting that due to legislative gridlock, Congress will not legislate an increase in the debt limit. The feared consequence is that the

1. Fed-induced complacency. Why should Americans worry? The Fed has guaranteed low interest rates at least through the middle of 2015, and perhaps beyond.

2. Debt-driven pessimism. Given the astronomical rise in overall US debt levels in recent years, Americans should worry because if interest rates merely go back up to "normal" levels, the US public and private debt burden will explode. Indeed, a mere "normalization" of interest rates could jeopardize the current economic recovery.

In many ways, I believe both positions are wrong - not because they are extreme, but because they are focusing on the wrong issues.

Why Fed-Induced Complacency Is Wrong

The reason why Fed-induced complacency is wrong is very simple: The

In this essay, I will address the risk of a US recession in 2013 based on the idea that the current expansion is getting "long in the tooth," and may be "running out of time."

The Average Length of US Economic Expansions

According to the National Bureau of Economic Research (NBER), the average length of economic expansions in the US going back to December of 1854 is roughly 39 months.

The current economic expansion that began in June of 2009 is approximately 42 months old. Therefore, on this basis, there would seem to be a