Fed Update

It seems, through some clever wording, that the Fed is gradually changing there stance on the economy and the future of the Fed Funds Rate.

They almost had me fooled...not. From the very beginning, I have said that the Feds saying that inflation is their main concern is a joke. It should be their main concern, but it isn't.

You can very clearly see the game that they are playing. Remember, that the Feds are a real spin factory. Their real concerns are keeping public credibility, rising equity markets, and keeping the bubble alive. All three of these things are impossible at this point.

The equity markets are rising. True and great, except not really. They are not rising on the wings of an enormous amount of liquidity. Liquidity in the form of the Yen and Swiss Franc carry trade, and the huge global growth in the mentary base. There has never been a bubble in the history of the world that hasn't collapsed, and this is the biggest bubble yet. These stock gains aren't based on anything that is real and, no matter what the Feds do, they will correct. I expect this correction to be sharp and near 40-50%.

The housing bubble still has a long way to go before it has "bottomed out." Housing prices usually rise at 1-2 points above inflation. They don't double in 6 years. Before I found a true interest in economics, I figured that it was impossible for housing to deflate. All you have to do is go to Detroit where you can buy a house for the same price as a new car to realize that that's not true.

Bloomberg and CNBC have loved the increase in housing starts. They say that it shows confidence in home builders. Who cares about home builders, how about home buyers. The last thing the housing market needs is more supply. As lending standards begin to tighten at all levels, prime included, expect home prices to continue to drop. Expect the U.S. consumer spending to fall of the face of the earth as they can no longer use their homes as a credit card. With the fall of consumer spending comes the fall of GDP growth. Like I said earlier, all bubbles pop.

Pardon my language, but when "shit hits the fan," expect the Federal Reserves' credibility to fall like the housing market. The main goals of the Federal Reserve, in actuality, are impossible to achieve. At best they can post pone what is to come, only making it worse. Expect a cut or two in the Fed Funds Rate in the coming twelve months. This will be disastrous for the economy and the USD, but great for gold. The reduced rates won't last too long before the feds will be forced to raise the rates higher to obtain some economic stability.

What have the Feds actually been doing and saying? Well, the haven't been doing much but they have been saying a whole lot. They are ever so careful in their wording. They originally said that inflation was their main concern. Well how can you cut interest rates, which is what they'd like to do, if inflation is running wild. In the most recent FOMC meeting, the Feds stayed away from discussion about housing and sub-prime and inflation, instead focused more on the moderate growth looking ahead. Basically, but not really mentioning it in a strong context, they unofficially said it wasn't their main concern. That was step number one. Today Federal Reserve Bank of Philadelphia President Charles Plosser said, "Inflation and inflation expectations are likely to be lower and more stable." WHAM, just like that, it's no longer the number one concern of the Feds.

If your saying, "Hold up a second here, it doesn't work like that...does it?" Well, that is a great question and the answer is yes it does and no it doesn't. The public believes it...for a period of time. What happens when the CPI numbers, and new wage numbers, and all of that good stuff comes out next month, and its higher? It might be a slam to their credibility, but probably not. The general public will take it stride, and if the Feds are good at one thing, it is spinning the data to the general naive public.

For me, the Feds never had any credibility in the first place so I don't really care what they say. I know what they are thinking. If you think they all those Ph. Ds in economics sitting over there don't know the dire circumstances of our economy today than your kidding yourself. I promise you that the objectives of the Federal Reserve are NOT in the best interest of the U.S. citizen. Protect yourself from the inevitable, and protect yourself from the Federal Reserve, buy gold.