MONEY 44 - FEDERAL RESERVE SYSTEM, STOCKS

THIS IS MY 44^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we will discuss the Federal Reserve Bank, the stock market and the current economy.

As we pointed out in previous blogs the Federal Reserve System is a separate entity from our US Government. The US Government has no controls or regulations over the System. To the best of my knowledge the Federal Reserve has never been audited.  There are 12 Districts in the System each with a Federal Reserve Bank. There also seven people who make up the Board of Governors. The president of the United States appoints the Chairman (Chair) of the Federal Reserve from these Governors however this individual must be confirmed by the Senate. This process was part of the Banking Act of 1935.

The role of the Federal Reserve is to assist our Treasury Department and lend monetary balance to our economy and system. The money lent is at very low interest rates. This concept was initiated by Alexander Hamilton in 1780.  The actual System was passed as an Act in 1913.

The Federal Reserve has been buying our newly created bonds (debt) to assist in the economic recovery since the near financial collapse in 2008.  The terms appointed to this were Quantitative Easings. This huge endeavor to stimulate the economy and help our banking industry has now reached over $4.5 trillion and should exceed $5 trillion before it has ended.

Now, where does the Federal Reserve Bank get the money to buy the US Treasury debt? From private wealthy investors and world institutions. The United States is still considered the safe haven for money. As has been pointed out in the past these bonds, mainly10 year bonds, are at a very low rate of interest. Big money still likes buying the US. The sad thing is that we will never be able to pay off our debts to the Federal Reserve. This happens all over the world.  Certain controlling banks own countries worldwide. Beneath the banks are the wealthiest people, and they end up with the control. “He who has the gold rules!”

Inflation has to some degree raised its head. This is currently noticeable in the food industry, especially with meats, fish and poultry. As we are in a global market much of our inflation comes from imported goods. Also, oil and gasoline has risen. This is not related so much to supply and demand than futures traders raising prices over the concerns in the Ukraine and Middle East.

Long-term inflation might be a problem. It is the goal of Janet Yellen, Chair of the Federal Reserve Bank, to keep inflation low over the next couple of years by keeping money tight.

World currency wars are heating up.  With all the money we have printed it weakens our dollar. That makes our manufactured goods and exports look very favorable on an international basis. Most other countries that produce a lot of goods for export are trying to weaken their currencies; this goes for China, India, Brazil and many others.

The stock markets have had so much money poured into them they are at highs. Once Quantitative Easing ends the markets should react negatively.  The stock market has been the “only investment game” in years. People are still careful of real estate investing. Homes are to live in, not investments. Most people lost quite a bit of money in their home values, and they have not forgotten nor have the values risen to pre-2008 levels in most places. I have predicted a strong stock market correction for months, and yet one hasn’t occurred. Who knows?  I certainly am not an economist, but when a lot of money chases a product there eventually needs to be corrections in that market.  This is so reminiscent of the housing bubble. Then, money was being thrown at the housing industry. Wall Street had a huge appetite to take packages of mortgages, re-form them into falsely rated bonds and sell those instruments worldwide.  So far this year the emerging markets and high tech stocks, considered riskier, are off their high positions by up to 10%. The question that comes to mind is if our economy has only averaged a 2% growth over the past 6 years how has the DOW Index of the stock market gone from a low of about 6,800 during those years to 16,500? The answer most know is Government interference not free market.

What would I do with stocks right now? (5/26/14) Well, I would have increased my cash position since the end of last year. With past Blogs I noted that there should be a significant correction to stock market highs. This sell off would be first the emerging markets, high tech and riskier stocks with high P/E's or little earnings. Now, I would concentrate on blue chip stocks, the very best, with low P/E ratios paying high dividends.

People haven’t forgotten the stress and losses of 2008.  Most people are very prudent and conservative; they are not spending money like before 2008.  I am not sure this will change any time soon.

The auto industry is doing fairly well, and banks are lending for cars. It amazes me that banks will lend on an asset that is guaranteed to lose value over time, and yet it is very difficult to get a home loan, or a line of credit on your house. The American dream was always to own a home that appreciated, but I guess we found that no longer to be true.

It has been reported recently that 43% of all home sales now are cash. This is the de-leveraging of America, and it is happening around the world. If people don’t have cash to buy things or they can’t borrow money from banks, how can you have a progressive economy or inflation?

Bottom line, it looks like we will plunk along for the next couple of years at least, with very little happening.

Things to ponder: Are the stock markets too big to fail in the government’s eyes? Yes. Are the markets manipulated? Yes? With the loss of trillions of dollars in our real estate industry, it has been reported the average American only has about $40,000 in net assets. With the stock market making the commercial banks/investment banks and the top 1% of the wealthiest even richer, what happens? People can’t live on $40,000 very long. Unemployment, especially with older people is very high, much higher than the government reports because people have given up looking for employment, and outsourced work/contract work is not included in these figures.

Switzerland a very wealthy country per capita had a vote this week (5/19/14) to pass a minimum wage of $25/hour; it didn’t pass. This would have brought a standard to the cost of living. Switzerland also had discussions on giving every resident/citizen a $3,000/month living grant.

What will we do in this country?