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Tour de Fed


Recently I've been going back through Marc Faber's book "Tomorrow's Gold", published last December. I highly recommend it. If nothing else, and whether you agree with his conclusions or not, this book provides some interesting background on the history of economic thought related to the business cycle.

One of the points Faber makes is that during the 20's boom, like the 90's boom, the pervasive trend of economic thought was that the business cycle was dead, or at least no longer applicable to certain anointed industries. I keep coming back to a quote from a book Faber cites titled "Crises and Cycles", originally published in 1936 by Wilhelm Ropke:

"... a painful reaction [to the credit expansion that accompanies a boom
period] can indeed be postponed by a further increase of the credit
supply but only at the price of a corresponding aggravation of the
ultimate reaction. An 'eternal boom' is therefore out of the question."

This was written in 1936, but could have been written last week, and in fact has been written about, or at least alluded to, by Scott Reamer in several of his posts on Minyanville.

From a timing standpoint, the most difficult question (also perhaps the most important) is how long the postponement will last. Toddo has written pretty extensively about the factors in place (upcoming election, war on terror/Iraq, sheer size of the financials and the power they wield) that make it attractive for those with a large stake in the matter to use all means necessary to stave off for as long as possible the ultimate and necessary wash out that must take place to "cleanse" the markets.

Along these same lines, John Succo's article on the truly incredible and unprecedented equal volatility in stocks and bonds may potentially prove to be one of the most important observations Minyanville readers will have ever seen in print.

With these forces at work I find it comforting to follow our technical indicators so that I can adopt a more agnostic posture within my big picture view. I find that these indicators help me manage risk, and hopefully increase my margin for error on either side of my larger thesis.

The cult of the Fed and its perceived ability to manage the markets is, in my mind, further proof that although few will today admit to believing the business cycle is dead (or that it could ever disappear for that matter), the psychology of that belief is still fully ingrained and more influential in actions and market behavior than words would lead us to believe.

If we have learned anything from history it should be that central bankers do not have the power, even if they do have the tacit authority, to manage markets. This doesn't mean central bankers are stupid, it just means they are merely central bankers.
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