Janet Yellen “Did the Right Thing”

Bill “Slick Willy” Clinton was right on.

On Tuesday, he told CNBC that the Federal Reserve would “do the right thing” on interest rates. And it did just that… or at least, the right thing for Bill’s wife.

Don’t kid yourself. Janet Yellen wasn’t going to raise rates and crash the stock market and economy seven weeks before the presidential election. She wasn’t going to go down in history as the person responsible for handing the White House to Trump.

How could she explain that to her comrades in arms in the faculty lounge at UC Berkeley?

So interest rates remain pinned to the floor. The markets keep levitating. And the odds of a major conflagration down the road have increased significantly. But that doesn’t mean there’s not big money to be made in the markets while the elites pull levers and bang out favors to friends…

Some market watchers, including legendary bond investor Bill Gross, actually believed the Fed might raise rates this month. Gross thought investors were underestimating the odds of a September rate hike. He believed it was self-evident that the Fed’s roughly decade-long policy of near-zero rates had run its course.

Of course, his point was correct. But he made the crucial mistake of thinking the Fed was guided by data and logic. It’s not. It’s something akin to a sorority.

Gross told CNBC he was so stunned by the Fed’s decision yesterday that he was having trouble speaking. But bless him, he did manage to speak some needed truth:

After hawkish talk at Jackson Hole from [Fed Chair] Yellen and [Vice Chair] Stan Fischer, who even said there’d be two hikes in 2016, they’ve chosen to defer once more a necessary hike to normalize short-term interest rates and provide savers, in my view, with at least a bit of thin gruel to work with to provide for education, retirement and health care needs.

The Fed’s decision on Wednesday was just a short-term fix to prevent any downside stock market action. The Fed’s been intervening like this for years, dating back to when Alan Greenspan flooded the banking system with reserves to provide “liquidity” during the 1987 stock market crash.

And we’ve seen it again and again in subsequent years where short-term government bailouts prevent needed periodic corrections. We’ve seen unsustainable businesses saved. And we’ve seen credit bubbles all the way to Matt Damon on Mars.

These obvious market excesses are never allowed to clear out. And this irresponsible behavior only guarantees a massive systemwide collapse — just like we saw in 2008–9.


Michael Covel
for The Daily Reckoning

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