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The Federal Reserve: Money for Nothing


History doesn't always repeat, but it often rhymes.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Who knows how long this will last, now we've come so far so fast.
--Don Henley

You almost have to smile.

Last night, I attended the New York premiere of Money for Nothing: Inside the Federal Reserve. This project has been in the works for many moons and it was well worth the wait. It opens nationwide in the coming weeks and it should be required viewing for the next generation of leaders, investors, and decision-makers.

The cast is a who's who in the financial marketplace, including current and former Fed officials (Paul Volcker, Janet Yellen, Alan Blinder, Peter Fisher, Dick Fisher, Thomas Hoenig, Jeffrey Lacker, Charles Plosser, William Poole, Marvin Goodfriend), economists and historians (Michael Bordo, Dave Colander, Jim Grant, Martin Mayer, Allan Meltzer, Raghuram Rajan, Richard Sylla, Bill White) as well as traders and investors (Peter Atwater, Tony Boeckh, Jeremy Grantham, John Mauldin, Barry Ritholtz, Gary Shilling, John Succo, and yours truly).

The story is a familiar one, albeit a deeper dive into the personalities and mechanics behind the US Central Bank. The history is rich with power and intrigue, leaving the audience with enough information to make an educated decision about the motivations and agendas of those pulling the fiscal and monetary puppet strings. Perhaps most refreshing is the candid look at the perpetual cycle of booms and busts, how they have manifested in size and scope, and the current attempt to change the natural ebb and flow of the business cycle.

There is the requisite hubris (Greenspan) and academic philosophies (Bernanke) culminating in the current crescendo of cumulative imbalances that dwarf historical precedent. The dot-com bubble was replaced by the housing bubble which was replaced by the government bubble, replete with many of the unintended consequences that we've attempted to map here in Minyanville. The common thread, of course, is that conventional wisdom, along with the price action in the marketplace, sounded the all-clear when caution was most warranted, over and over and over again.

Of course, we awoke this morning to higher equity prices around the world, due in large part to the specter of a diplomatic resolution to the Syrian stand-off. At the same time, equity bulls are attempting to push stocks through layered resistance in the S&P (INDEXSP:.INX) per the chart below, almost daring the bears to get in their way. As time and price is the ultimate arbiter of variant financial views, this must be respected, if and when.

As Jim Bruce and his team remind us in his excellent documentary, however, the financial fabric remains a tangled web of debt, derivatives, and leverage, a cornucopia of tinder looking for a match. Syria, much like Lehman Brothers, is a symptom, not a cause, and seeds of discontent continue to percolate under a seemingly calm financial surface.

That might not be today's business, but if we've learned anything through our years together, it's that history doesn't always repeat but it often rhymes.

Random Thoughts:
  • The ability of the bulls to hold this morning's gains are paramount through a technical lens.
  • The regional banks led the Banking Index (INDEXDJX:BKX) higher in the back half of the summer but yesterday they weighed them down. Higher yields will help their net interest margins but could dampen loan growth, or so the thinking goes. SunTrust (NYSE:STI), M&T Bank Corporation (NYSE:MTB), Regions Financial (NYSE:RF), Comerica (NYSE:CMA) and Zions Bancorporation (NASDAQ:ZION) are proxies for that subsector.
  • Nasdaq (INDEXNASDAQ:NDX) 3150 is a level to toss on your radar, per the chart below. Past resistance is future support.
  • The tape feels like it wants to break out, but anticipating technical affirmation (either way) can be a painful process.
  • With the S&P and Dow Jones (INDEXDJX:.DJI) up high-teens -- and the NASDAQ 23% higher -- you can bet that performance anxiety is good and thick as we edge into autumn.
  • These are historic times; one day, our grandchildren will study the policies of the Federal Reserve and ask grandma and grandpa what it was like. Pay attention, so you can pay it forward, much like our grandparents did for us.

Twitter: @todd_harrison

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