Peter Boockvar: Dear Federal Reserve…

Peter has something to get off his chest. Posted in full with his permission, an open letter to the Fed. Hope you enjoy! – JB

***

Dear Federal Reserve:

As we approach your last get together of the year I first want to wish you all great holidays and a happy and healthy new year. I also want to extend my utmost respect for the time you have given to public service in your contribution of what is the Federal Reserve system with the best intentions. But, as they say with the best intentions, it leads to roads unforeseen to put it nice. As it is year end it’s always a good time for reflection and let’s look in the mirror together.

The predominant investing rallying cry over the last 15+ years of the ‘Greenspan (now Fed) put’ and ‘search for yield’ without regard to risk is again showing its darker side, this time in the energy patch. We of course saw it first in technology land in the late 1990’s, to be repeated in a different fashion in the mid 2000’s via credit and housing and now in the US oil and gas industry. Thanks to those two sayings, the US economy has become the US ‘boom and bust’ economy. Your sole focus on consumer price inflation has again shifted your attention from the negative repercussions of excessive asset price inflation that inevitably always mean reverts. This time, an epic bond bubble is showing some big time cracks in corporate land.

Without rehashing the two previous bubbles, let’s talk about the new one and focus on the ‘search for yield’ without regard to risk syndrome that again created extreme asset price inflation and again got hold of parts of our economy. Via another one of your cycles of interest rates well below the rate of inflation, the manhandling of longer term interest rates with QE and amazing American ingenuity and technology, anyone with a drill bit and a land lease was able to get a loan as long as oil prices levitated north of $80. Bloomberg estimates that since early 2010, $550b loans and bonds were issued by the oil and gas industry. Give me yield or give me death was essentially the mantra for this and many other investments. And, the money kept flowing, the drilling kept coming and all of a sudden the spurt in supply bumped up against a slowing global economy and then poof. The bubble burst essentially in a crash with crude prices falling by 46% over the past 6 months, not coincidentally either just as QE was ending.

Which brings us to another one of your meetings this week where the debate now and for 2015 is when and how do you normalize interest rates and whether your focus should be the better labor market and the improvement in wage gains in November or more so the sudden drop in commodity prices mostly driven by lower oil prices. The irony of this discussion though hopefully won’t escape you. Cheap money that you created fueled a drilling boom that oversupplied a market that now has shrinking demand. Now with lower oil prices, headline inflation and inflation expectations as a result, you may actually use low inflation as an excuse to keep rates low for longer, the same policy that previously created the boom and now the bust. In your desire for higher inflation, cheap money instead lead to malinvestment and over capacity that inevitably lead to a downside and lower prices.

Those fiber optic cables would have been laid anyway, those homes would have been built anyway and those shale wells would have been drilled anyway but the ‘Fed put’ and ‘search for yield’ rallying cries brought so much of this activity together at once in their respective time periods that the boom it created inevitably lead to the busts that followed. You know excessively easy monetary policy not only buys time, it steals economic activity from the future. Buy and invest today maybe what you would have done tomorrow but tomorrow always comes. Why isn’t this lesson ever learned?

I will sum up with this: history is replete with the bad economic consequences of trying to manipulate human behavior with government induced price controls. Over the last 15 years especially it’s been control over the price of money and current policy is as if we have an economic five alarm fire. I’m not calling for you to quickly normalize policy immediately. I just believe that the process must begin, however slowly, as soon as possible and asset price inflation should no longer be ignored or only acknowledged with vague comments about overvaluation in select asset markets. Words and macro prudential regulation are not going to do it. The path ahead will be disruptive but that can no longer be avoided as 6 years of ZIRP and a 5 fold increase in your balance sheet has already way overstayed its welcome. The longer you wait, the worse the consequences will be when you do. Again, happy holidays and happy 2015.

Sincerely yours,

Peter Boockvar
Managing Director and Chief Market Analyst, The Lindsey Group LLC

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Tuesday Morning Links | timiacono.com commented on Dec 16

    […] Dick Bove: Fed ‘Forcing Bank Transactions Into Shadow Market’ – MoneyNews Peter Boockvar: Dear Federal Reserve… – Reformed Broker Industrial Production, Russia – Fed […]

  2. tutoring services commented on Sep 20

    … [Trackback]

    […] There you will find 66154 additional Information to that Topic: thereformedbroker.com/2014/12/15/peter-boockvar-dear-federal-reserve/ […]

  3. Eat Verts commented on Sep 22

    … [Trackback]

    […] There you can find 81224 more Info to that Topic: thereformedbroker.com/2014/12/15/peter-boockvar-dear-federal-reserve/ […]

  4. bitcoin era review 2020 commented on Sep 29

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2014/12/15/peter-boockvar-dear-federal-reserve/ […]