Kevin Warsh, a former Federal Reserve Board Governor, gave a recent and very interesting speech at Stanford University recently.
Warsh resigned from the Federal Reserve Board 8 months ago after serving for 5 years.
In his speech, he noted that Central Banks are so heavily influencing asset prices that investors are unable to ascertain market values. What he essentially is saying, is that there are no free markets any more.
All prices are being set by the Central Banks, led by the Federal Reserve.
Therefore it stands to reason that if you can figure out what the Federal Reserve is doing then you can accurately predict the markets.
Economic analysis goes out the window. Now it becomes simply a game of predicting the Federal Reserve. They’ve told us they intend to keep interest rates at zero for the next three years. Therefore, don’t expect much movement in the bond markets in either direction. In fact, past evidence has shown they will continue to buy bonds on the open market to keep long-term interest rates down as well. They continue to deny they are printing more money, but all other evidence seems to show that they are in fact doing exactly that. As a result, I would expect the stock market to continue to rise although its rate of ascent is directly related to how much they print. And that appears to be anybody’s guess.
Commodities will also rise, with the exception of gold and silver where the Federal Reserve continues to intervene to hold the price of these commodities lower so that the dollar will continue to be the safe haven investment. It also appears that they intervene heavily in other currencies, particularly trying to keep the dollar weak and the Euro strong.
In short, Mr. Warsh has confirmed something we all expected. There are no free markets and the true values of any asset are a big unknown. Instead all we have is the price that the Federal Reserve says it should be. This is price controls if I’ve ever seen it. Price controls have never worked, and I don’t see them working this time.
