Sunday, March 6, 2011

Why the Federal Reserve "Is" Creating An Asset Bubble

We believe every qualified investor does their own detailed analysis of the Economy and Individual Companies, so we won't bother with driving into details that we expect investors should already know.

However, a summary of why the U.S. Federal Reserve is perpetuating a prior asset bubble, the U.S. Real Estate market, and creating a new more dangerous asset bubble, the U.S. Equity Markets, so we will lay out the highlights:

-The new normal is a perpetual unemployment target rate of 10%. The current real unemployment rate is 15% nationally when those that are no longer eligible for unemployment benefits or executives who do not qualify are included.

-The fact that the S&P is trading at 17-18 times earnings, is not comparable to prior periods where 30 times earnings was considered normal. Thus the S&P multiple for companies should trade much lower in the "new normal economy"

-U.S. Corporations may have record amounts of cash, but that cash is not being deployed and translated into real GDP and increasing consumer income. In essence, corporations are becoming wealthier due to virtually zero interest rates for the highest quality companies, lower debt service and stock repurchases, all which centralize wealth, not distribute it.

-Real asset prices continue to decline across the U.S. Trillions of dollars of Mortgaged backed securities have been purposely warehoused by the U.S. Federal Reserve at Face Value and loans made to Commercial Banks and Hedge Funds based on this defunct collateral, which has not been written down to net realizable value. So the Real Estate asset bubble and lie continues, even while the real underlying asset prices continue to decline and are projected to decline another 25% in 2011. Some call this the Ponzi Scheme the U.S. Federal Reserve is running.

-Then there is the fact that the U.S. Federal Reserve, in collusion with the Primary Dealer Banks is manipulating the U.S. Treasury market to artificially pump up prices of Treasury securities and depress market yields, thus keeping the cost of money to the major commercial banks at zero %, while the average U.S. Consumer has virtually no access to a mortgage, a consumer loan, or any other comparable credit, which should be priced between 4-8%.

Thus to summarize, when we pull back the covers on the U.S. Economy; real estate values continue to decline, consumers are not able to access new mortgages, real unemployment is 15% with the new normal target of 10%, wealth is being centralized in the large commercial banks and corporations due to Federal Reserve capital subsidies, and the U.S. Debt to GDP ratio is completely out of control to the point that the U.S. Treasury Debt could be considered "Junk Bonds" when the Federal Reserve and Treasury Balance sheets were combined and "marked to real market value".

So, is the Federal Reserve perpetuating an artificial asset bubble? Absolutely and it is the most dangerous financial crisis ever to hit the U.S.

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