Federal Reserve Moves Sensationalized and Twisted by Blogosphere Paparazzi

The actions of the Federal Reserve may be a symbol for everything that’s wrong with American business and ethics. However, sometimes the ‘paparazzi’ go too far and vilify the Fed unjustly … at the cost of Mom and Pop investors.

Before we talk about the blogosphere paparazzi, allow me to set one thing straight: I don’d like the Federal Reserve and I’m not sticking up for the Federal Reserve.

The Federal Reserve is an institution set up by bankers for bankers, an insurance company for the bankster mafia.

However, an analyst, reporter, journalist, or blogger should be driven by facts, not personal biases or dislikes. Just because an institution has a closet ‘packed with skeletons’ doesn’t give us the right to invent misleading information.

It’s no secret that the Federal Reserve has been pumping money in the market, sending indexes like the S&P 500 and Dow Jones to never before seen highs; in the process enriching the very banksters that caused the worst financial collapse since the Great Depression.

The Federal Reserve is the deserving scapegoat for many wrongs committed on Wall Street.

But publishing sensationalized and misleading reports just for the sake of capturing attention is bad for investors. How so?

Just recently, a very popular blog stated that “QEternity may have to be increased by 50% in the coming year.”

This claim was based on a tweet by the president of the Chicago Federal Reserve, Charles Evans (see original tweet below):

According to Evans’ tweet, the Fed may need to purchase $1.5 trillion in assets until January.

How Does $1.5 T Compare to Current Asset Purchase Pace?

Based on the assumption that the Fed is buying $85 billion worth of bonds per month ($1.02 trillion/year), we can see where the 50% increase claim is coming from.

However, the haphazard calculation overlooks the fact that the Federal Reserve is ALREADY spending an additional $25 billion per month on reinvestment of maturing bonds. Is that what Charles Evans may have meant?

Mortal humans just don’t have the ability to decode the enigma-like messages of Federal Reserve personnel, but based on the numbers in Evans’s statement it could mean that asset purchases will continue at the same pace or that asset purchases may only increase 26% – $85 b x 14 (November 2013 – January 2014) compared to $1.5 trillion.

This conclusion is less sensationalistic, but it won’t persuade investors to buy into the S&P 500 or Dow Jones just because the Fed may beef up asset purchases.

It’s not necessary to ‘enhance’ Federal Reserve news to make them more interesting. The Federal Reserve is quite capable of making fools of themselves without anyone else’s help.

For example, an official 2012 Federal Reserve study (posted on the Federal Reserve NY website) revealed that the Fed’s FOMC meetings drove the S&P 500 55% above fair value and that the S&P 500 (NYSEArca: SPY) would be flat since 1994 if it wasn’t for the Fed (click here for report: Federal Reserve Study: FOMC Drove S&P 500 55% Above fair value).

In direct conflict with the above study, a recent official report by the Federal Reserve of San Francisco claims that the Fed’s QE barely affected stocks and the economy (click here for report: Federal Reserve Reflects Responsibilty for Stock Market Overvaluation)

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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German Central Bank Warns of Severe Correction

Germans are conservative and central bankers are by nature careful about their choice of words. So we should take note when German Central Banks sound an alarm about a severe correction, right? Maybe not completely.

“Central Bank Sounds Alarm” said the front page of a German financial newspaper.

The article continues (translated from German into English): “Central bankers choose their words carefully. Central bankers avoid dramatizations or exaggerations. Danger is at hand when the good old German Central Bank (Bundesbank) warns of severe real estate losses caused by price corrections.”

According to calculations by the German Central Bank, home prices in some metropolitan areas (such as Munich, Duesseldorf, Hamburg and Berlin) are up to 20% overvalued.

“The rapid price increase is not justified,” says the German Central Bank. But, “despite of an overheated market, the Central Bank does not expect a real estate bubble like seen in the USA.”

According to the newspaper (Handelsblatt) only a small portion of German real estate is financed. Real estate loans grew only moderately since 2010, currently at euro 1.1 trillion.

Measured by size, Germany is a small country, but it’s been the engine that kept European markets (NYSEArca: VGK) going. Germany’s economy also has a notable effect on international markets represented by the iShares MSCI EAFE ETF (NYSEArca: EFA).

Not Like Las Vegas

Germany is not like Las Vegas, what happens in Germany doesn’t stay in Germany (NYSEArca: EWG).

The chart below – which plots the German DAX against the S&P 500 (SNP: ^GSPC) – shows a close correlation between the DAX and S&P 500 (NYSEArca: SPY).

Germany isn’t an island, and if Germany gets into trouble, it will ‘export’ its problems along with Porsches and BMWs.

In fact, adding a few simple trend lines to the above DAX chart shows that the DAX has arrived at a crucial inflection point. Click here to see the chart with trend lines: Germany’s DAX Index Defined by Two Lines

Is Central Bank Alarm Bullish?

Perhaps the German Central Bank has ripped a page out of the Federal Reserve’s book.

It’s not common knowledge, but two recent Federal Reserve studies basically warned of a market crash and said it won’t be caused by QE. Click here for a quick and insightful summary of the bizarre studies: Federal Reserve Study

One thing is for sure, the persistent supply or ‘market crash alerts’ has provided the ‘wall of worry’ needed for stocks to climb higher. There is actual evidence for this.

To read why ‘false’ warnings and political chaos have provided the perfect environment for stocks, click here: Is the Mix of QE and Political Chaos the Perfect Environment for Stocks?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Surprising New Fed Study – Is it Preparing Americans for a Market Crash?

This study by the Federal Reserve of San Francisco will have you scratching your head. The claims made defy common logic and are in direct conflict with a study published by the Federal Reserve of New York. Nevertheless, it might just be a brilliant setup for bearish future ‘events.’

The latest study by the Federal Reserve Bank of San Francisco (FRBSF) draws unexpected conclusions that almost make you believe a disgruntled Fed employee did it. But be assured, it’s an official study published on the FRBSF website.

The Federal Reserve study analyzes and quantifies the effect of large-scale asset purchases (LSAPs), also known as quantitative easing (QE) and lower interest rates, on the economy and inflation.

The results are uncharacteristically frank and seemingly self-defeating, but the intent of this study may just be brilliant (more below).

The study is about 5 pages long and can be summarized roughly by a few paragraphs.

The final conclusion is that: “Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation.”

How moderate? “A program like QE2 stimulates GDP growth only about half as much as a 0.25 percentage point interest rate cut.”

How much does a 0.25% rate cut boost the economy? “GDP growth increases about 0.26 percentage point and inflation rises about 0.04 percentage point.”

In other words: “QE2 added about 0.13 percentage point to real GDP growth in late 2010 and 0.03 percentage point to inflation.” (see chart)

Furthermore, the study states that: “Forward guidance (referring to the low interest rate policy) is essential for quantitative easing to be effective.”

In other words, QE only works in conjunction with a low interest rate policy. The federal funds rate, the rate banks charge each other to borrow money deposited at the Fed, is already near zero. The 10-year Treasury yield (Chicago Options: ^TNX) is just coming off an all-time low.

It is no longer possible to ‘supercharge’ QE with ZIRP.

A Brilliant Move?

A few days ago, the Federal Reserve came out with a report stating that leveraged ETFs may sink the market. View related article about leveraged ETFs at fault for market crash here.

Now the Fed is basically saying that QE didn’t do squat. The converse logic of the Fed’s report is that QE is not to blame should stocks tank (after all, if QE didn’t drive up stocks, tapering can’t sink stocks). The Fed is basically saying ‘if stocks tank it’s not because we spiked stocks and are now taking the punchbowl away.’

This is ironic, because even the Geico caveman knows that various QEs buoyed the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) to new all-time highs. Even economically sensitive sectors like consumer discretionary (NYSEArca: XLY) trade in never before seen spheres.

Did the Federal Reserve ever admit to manipulating the stock market higher?

Sometimes in cryptic terms without any direct admission of guilt, but there is one exception.

An official report by the Federal Reserve of New York actually puts a shocking number on how much above fair value the Fed’s QE drove the S&P 500.

A detailed analysis of the report can be found here: New York Fed Research Reveals That FOMC Drove S&P 55% Above Fair Value

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF