What We're Reading

Ms. DiMartino Booth, why is the Federal Reserve bad for America?
Because of its intellectual dishonesty. The Fed noticed around 2009 that if they had had a more reliable and realistic inflation gauge on which to set policy, they would have seen the crisis coming. But despite that recognition, they chose to do nothing about it.

Are there more realistic inflation gauges?
Several Federal Reserve Districts have come up with alternative gauges. The underlying inflation gauge from the New York Fed for example also includes asset price inflation. And it runs about one percentage point higher than what the Fed measure is – they prefer the core Personal Consumption Expenditures Price Index, the core PCE.

How would monetary policy look like with a more realistic inflation gauge?
Monetary policy would be much different. The Fed would not have been able to maintain a monetary policy as easy as it has done over the last couple of years. Central bankers are hiding behind the core PCE being at 1,6%. The

Most economists surveyed by The Wall Street Journal expected Federal Reserve officials to begin winding down their $4.5 trillion portfolio of bonds and other assets this year.

Nearly 70% of business and academic economists polled in recent days expected the Fed will begin allowing the portfolio, also called the balance sheet, to shrink by allowing securities to mature without reinvesting the proceeds at some point in 2017. Of the economists who expected a shift in the Fed’s balance sheet strategy this year, the majority predicted the process would begin in December.

In last month’s survey, just 22.2% of economists expected the Fed to begin shrinking its portfolio this year. Fewer than a quarter of economists in the latest poll expected the Fed to wait until the first quarter of next year to start to whittle down its portfolio, compared to a third last month.

In recent weeks, Fed officials have said they are discussing plans to start gradually reducing the large bondholdings the central

Even the most bullish of bulls have finally seen the light.  From this weeks Stocktwits post.

A banking (currency) system is an act of faith: it survives only for as long as people believe it will” – Michael Lewis, Boomerang, 2011

Only 15 days ago, there were so many charts that looked ready to break out and participate in a year-end market rally. Fast forward two weeks of political inaction in the face of rising European sovereign debt yields and equity markets across the world look like Niagara Falls. A typical story of 2011 – the obvious rarely happens, the unexpected constantly occurs. Constant false breakouts and breakdowns that 2011 brought has gradually conditioned market participants to shrink their investing horizons. For better or for worse, we have all become traders.

There is an apparent crisis of confidence in capital markets. No one wants to own European bonds, which makes the cost of borrowing unattainable for countries like Italy and Spain. The lack of trust often le