Our Economic Emperor Has No Clothes

Includes: DIA, GLD, IYR, QQQ, SPY
by: Markos Kaminis

In the darkest days of the financial crisis, when Treasury Secretary Paulson seemed overwhelmed and President Bush looked frazzled, Federal Reserve Chairman Bernanke ran the show. His leadership was instrumental in our avoidance of an economic depression. He earned his place in history as our economic emperor. But last week, after all was said and done, we discovered our emperor has no clothes.

The Federal Reserve chairman seemed to be stripped last week, when after years of providing extraordinary support to the real estate market and the broader economy, Chairman Bernanke announced in the post FOMC press conference that he had been "deputized" to declare that the end of asset purchases would begin this year and end next year. Given the evidence of the effect this would have on the real estate market, after a month's worth of speculation about it that brought with it rising mortgage rates and dying mortgage activity, a Fed chief sitting in the sheriff's seat should have instead declared the continuation of the program for the foreseeable future. Add to that President Obama's strange statement about the length of the Chairman's career, which he implied was about to end, and it seemed to me that our economic emperor no longer has clothes.

In Rome, Caesar was supported by his senate. Some might say the "senate," which in this case is known as the Fed Board of Governors, has been undermining our emperor from the start. It would only be possible of such an accomplished person because of Bernanke's democratic nature and humble demeanor. From the beginning, a handful of them have dissented, warning of runaway inflation and new asset bubbles that would form because of Bernanke's determination to give the economy as much support as possible. At least one bubble did form in precious metals, as evidenced by the price charts of the metals and in the SPDR Gold Shares (NYSEARCA:GLD) and iShares Silver Trust (NYSEARCA:SLV) over the last several years. It's also arguable whether another sort of Fed bubble was forming that could have done harm to the dollar. Still, Bernanke was determined to avoid repeating the failures of our past, which he studied so thoroughly in school. You see, Chairman Bernanke is a student of the Great Depression. So he knew exactly what to do to avoid repeating history when fate threw him into the fire of the financial crisis.

They whittled at him meeting after meeting so that he finally weakened enough to fall, it seems. Or maybe he just grew tired, and has taken his eye off the ball. Or perhaps he knows about some other issue that we do not, like say for instance a pending war with Iran or some other disruptive event. Perhaps that would make this seemingly nonsensical action look sensible.

Talk of his retirement from the pivotal role at the Federal Reserve has intensified, with President Obama saying publicly that he had stayed longer than he wanted, and probably longer than he should. Some said the statement was akin to a public tar and feathering; I disagreed. Still, it served nobody but the critics nonetheless, and maybe it is affecting the chairman's vision as well. Because, otherwise, I for the life of me, cannot understand what the Fed was thinking last week when it said it would begin pulling back asset purchases this year and complete them in the next.

At a time when we needed the emperor to recognize once again exactly what the economy and the real estate and securities markets required, he was shown to have no clothes. The Fed's failings begin with its economic forecast, which is so flawed and fluffy, as I noted in my article the Fed's Math Just Doesn't Add Up. I thought for sure the Fed would get things straight in this regard this week, leading to a prophesized economic shocker for the market in the form of a sharp downward adjustment to the GDP growth forecast. However, the emperor has no clothes.

Even with evidence that mortgage activity has been declining on steadily rising mortgage rates, the Fed still went forward with its plan. Even at the risk of derailing the real estate recovery, the Fed moved on. Even after witnessing long rates spiking and stock market volatility, the Fed went forward with its plan. Might it be because the emperor has no clothes?


6/18 to 6/21








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When the economy shows signs of damage it will be late in the game to backtrack. If home prices are halted and the housing recovery jolted, it will be late in the game to act. And if this madness is not stopped, when history recounts the Federal Reserve and its actions through the whole of the crisis, it will remember that a great man led us through it, but at the very end of it all, as we could almost taste victory, we discovered that the emperor had no clothes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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