US Fed Rigged the Markets, Violated Mandate, Hurting Investors

US Fed Rigged the Markets, Violated Mandate, Hurting Investors

US Fed Rigged the Markets, Violated Mandate, Hurting Investors


The US Fed Should consider whether the policies they pursue might be harmful to its mandated goals.

One can argue that for an economy to reach its optimal long term potential, much of it lies in the realm of fiscal policy. The US Fed’s mandate is on “monetary and credit aggregates”.

It now appears that the Fed has deviated from its mandated focus on ‘monetary and credit aggregates’ and are harming an economy’s long term potential.

In theory, focus on ‘monetary and credit aggregates’, should allow the Fed to focus on monetary policy.

In practice, the Fed, and other central banks, have increasingly veered into fiscal policy.

Fiscal policy, in contrast to monetary policy, does not deal with aggregates, but with favoring sectors of an economy, i.e. making what may easily amount to political calls as to who wins and who loses.

I the last 8 years the world’s central bankers have created distortions in the credit allocation process.

The Big Q: How can one expect to reach an economy’s long run potential if policy makers interfere in the credit allocation process?

With their actions it is no surprise that the economy is running way below its potential, as policy makers have become big government central planners.

The central banks have compressed risk premium, thus making risk assets, stocks and junk bonds, appear less risky. In this QE era risky borrowers have been getting a subsidy distorting the capital allocation process of investors, investing in assets that have a higher risk profile than they otherwise would.

This is know as investors chasing yield.

What is bad about this is that these assets are still risky and get riskier, and the dependence on central banks to ‘come to the rescue’ whenever risk sentiment flares up is built in.

Meaning that the Central banks own the problem.

The reality is that the stakeholders of risk assets ought to own the problem.

And the way to get shareholders to own the problem is to allow a market based pricing of risk, a market where a risky borrowers pays a reasonable premium.

The US Fed should allow the market to determine this, and while the market may not always be right, the opposite is wrong, as the Fed cannot know what the appropriate risk premium is.

Over the past 8 years the central bankers have avoided allowing the market to price risk premium because it might render some issuers, including potentially some sovereign governments, insolvent.

This is a major problem for the US where we have seen Key shifts in the capital structure of corporate America. Shifts, such as a raising debt to finance share buybacks, but without an investment in future productivity.

Totally wrong.

As such we are seeing financial assets rise with a major populist backlash because the man or woman on the street feels the game is rigged.

The Fed says no, that it is pursuing it inflation target.

HeffX-LTN agrees with the public, the game is rigged, as the Fed meddles with efficient capital allocation to the detriment of the economy’s long term potential. These low long term interest rates are in direct violation of the Fed’s mandate.

For many investors, this has meant that they stay on the sidelines, as they do not like to invest in a rigged game. For others, it has meant: join the ride and enjoy a rise in both equity and bond prices.

What it really means is that the government created an environment where the traditional way to diversify a portfolio might not be effective when there is another downturn.

The time to diversify a portfolio is when times are good not when times are bad and wealth is wiped out.

Thursday, the US major stock market indexes finished at: DJIA -46.23 at 18479.91, NAS Comp -24.44 at 5259.48, S&P 500 -4.86 at 2181.30

Volume: Trade was moderate with 818-M/shares exchanged on the NYSE

  • Russell 2000: +10.7% YTD
  • S&P 500: +6.7% YTD
  • DJIA: +6.1% YTD
  • NAS Comp: +5.0% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.31) Neutral (-0.13) Bullish (0.47) Very Bullish (0.58)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.29) Neutral (0.09) Bullish (0.48) Bullish (0.29)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.30) Neutral (0.05) Bullish (0.35) Very Bullish (0.50)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Very Bearish (-0.57) Bearish (-0.35) Very Bearish (-0.61) Very Bearish (-0.75)

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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