Fed's Actions Leave Me Skeptical and Confused

Dec. 26, 2007 5:36 AM ET1 Comment
David Merkel, CFA profile picture
David Merkel, CFA

I’m not sure what to title this piece as I begin writing, because my views are a little fuzzy, and by writing about them, I hope to sharpen them. That’s not true of me most of the time, but it is true of me now.

Let’s start with a good article from Dr. Jeff: 'Is the Fed Ahead of the Curve?' It’s a good article because it is well-thought out, and pokes at an insipid phrase “behind the curve.” In one sense, I don’t have an opinion on whether the FOMC is behind the curve or not. My opinions have been:

  • The Fed should not try to reflate dud assets, and the loans behind them, because it won’t work.
  • The Fed will lower Fed funds rates by more than they want to because they are committed to reflating dud assets, and the loans behind them.
  • The Fed is letting the banks do the heavy lifting on the extension of credit, because they view their credit extension actions as temporary, and thus they don’t do any permanent injections of liquidity. (There are some hints that the banks may be beginning to pull back, but the recent reduction in the TED spread augurs against that.)
  • Instead, they try novel solutions such as the TAF. They will provide an amount of temporary liquidity indefinitely for a larger array of collateral types, such as would be acceptable at the discount window.
  • We will get additional consumer price inflation from this.
  • We will continue to see additional asset deflation because of the overhang of vacant homes; the market has not cleared yet. Commercial real estate is next. Consider this fine post from the excellent blog Calculated Risk.
  • The Fed will eventually have to choose whether it is going to reflate assets, or control price inflation. Given Dr. Bernanke’s

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David Merkel, CFA profile picture
Please note that I do not read comments posted here, nor respond to messages here. I don't have the time. If you want my attention, you must seek it directly at my blog. David J. Merkel, CFA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. In 2008, I became the Chief Economist and Director of Research of Finacorp Securities (http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/02-08-2008/0004752449&EDATE=). Finacorp went into liquidation in June 2010, after which I decided to open my own asset management shop, Aleph Investments, LLC. I manage stock and bond portfolios for clients. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth. Visit this site: The Aleph Blog (http://alephblog.com/)

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