Washington, DC -- (ReleaseWire) -- 05/25/2016 --DAWN BENNETT: Jeff Snider is the Head of Global Research for Alhambra Investment Partners. As a part of that research effort, Jeff has authored and published numerous in-depth investment reports that have run contrary to the established opinion being fed to us by the media. In nearly year and a half run up to the panic in 2008, just to give you some backdrop on Jeff, he analyzed and reported on the deteriorating state of the economy and markets, and even in early 2009, when the conventional wisdom out there focused on the positive, he focused on the near perpetual gloom, which was right. He did the right thing and there aren't a lot of people out there like Jeff. Today, in a number of Jeff's published writings, he speaks of a watershed moment where he in particular refers back to June of 2003, and FOMC meeting, that was one of those events that should be 'marked in history', he writes, 'truly relevant to the future development of where we are today.' And it actually is the backdrop of this sustained economic decay that we are in. Jeff, welcome to Financial Myth Busting.
JEFFREY SNIDER: Good morning, Dawn. Thanks for having me on.
BENNETT: Following this week's FOMC meetings' minutes publication, it resulted in violently revising the June rate hike odds from 4% to 30%, and then the July rate hike odds from 20% to 50%, and then of course, the cries of leniency began, people want helicopter money. I've got to believe that the market is not ready for a market hike. Do you agree and would it be a policy error to raise these rates?
SNIDER: I don't think the market is ready for pretty much anything that's going on right now. Any small change, and it seems like everybody's nervous about what that may be. And I think with monetary policy it's probably that much more amplified given that there's so much uncertainty about what it might mean as far as accommodation and main stream views of what accommodation actually is or might be.
BENNETT: What do you think of the idea that maybe a policy error is exactly what the Fed should engage in? Maybe we should see this happen, it would actually end all the bubbles and it would allow us to almost restart the system, reboot the system if it went through?
SNIDER: I agree with you. And I actually think that what the Federal Reserve actually does is largely irrelevant. And the Fed doesn't actually have any direct control over even the money supply. And mostly what they're doing is just policy communication. If you look at the Federal funds market itself, it's a shell of what it used to be. The Federal funds rate for that matter is basically irrelevant. There's very little volume in Federal funds at all. So when they're raising or lowering the Federal funds rate, it's more about trying to signal psychology and market sentiment than anything else. So I don't think they actually much control over the market. So it's really, like you said, about establishing what we should actually be following and it isn't these 12 economists sitting in a room in Washington debating on what they think is the most important thing in the world.
BENNETT: You've written a few times about the Federal Reserve meeting back in 2003, which I mentioned in the opening, it's as if the committee members at the time, to your point, anticipated that they would have no power going forward, yet they did nothing about it.
SNIDER: That's exactly it. It's for the briefest of moments, that particular moment in time, they just realized that maybe they should have a little bit of doubt about monetary policy itself because nothing seems to be working. At that time, you've got to remember the dotcom bust was still happening, stocks were still dropping, although they hit bottom even by that point, the economy was not recovering after dotcom recession, so it was like the first jobless recovery that we had experienced. And also the Bank of Japan had just done QE and actually had to do it twice. So they had every reason to suspect that maybe, just maybe, monetary policy wasn't this magical, wonderful, utopian tool that they all thought it was.
BENNETT: Even Alan Greenspan freely admitted during that meeting that he wasn't sure what would happen a result, and he encouraged them to continue to study the results as he felt that the data could prove useful in the future, but it's like they completely denied the results and they've put their blinders on, and they blame him, by the way, for having set this up.
SNIDER: Again, it's the circumstance of the time, because at that moment they had reason to doubt, but then also everything starts to turn around. Of course, it wasn't turning around for any normal economic process, it was again artificial, the housing bubble was going into its mania phase, and so that gave them the cop out to not bother looking at what they were discussing at that meeting. Because they thought that they had engineered a recovery through just a Federal fund rate, when that wasn't really the case. It was a housing bubble that got them out of their disaster and so they just decided that why bother doing any further research when they thought that they did have the ability to create a recovery.
BENNETT: We primarily have academics in these positions, and it boggles my mind that they've denied data that's been presented to them. If the maestro himself was so unsure of the effects of monetary policy, I just can't figure out how Ben Bernanke and Janet Yellen act with such confidence and denial.
SNIDER: And the funny thing is if you go back to that meeting and you read through the transcripts — which I urge everybody to do because it's public record, it's one of those things that I think people need to understand how all this stuff gets done and why it gets done — if you read through the transcript of that meeting, Allan Greenspan and some of the other members were raising these doubts and it was clear that they had these doubts. Ben Bernanke was not one of those that did. His comments and his quotes were full of the same kind of self-assured confidence that you see today, that you saw all throughout the crisis. And it's clear that he believes what he says and he thinks he has an academic background and evidence for it. Undoubtedly there are any number of regression models and statistics that back up his claim, but those things don't matter in the real world, again like the Federal funds rate no longer represents anything significant in the real world.
BENNETT: Greenspan also cautioned the Fed against moving from policy change to policy change without giving anyone a clear sense of where they're going, which is what he said hurt Japan so badly over the last 30 years. And today it just seems our Fed appears intent on replicating Japan's central bank's mistakes. Are we going to likewise, experience the same fate of prolonged, multi-decade, bear markets like they have?
SNIDER: Unfortunately, that's a possibility. I think that we're following the Japanese path a little too closely to deny the possibility at all. The reason is, again, because they didn't heed that warning in June 2003 and actually understand what was going on, and so by 2007, 2008, 2009 they left themselves no alternative but to do what they already knew didn't work. They knew in June 2003 that Quantitative Easing in Japan had failed, and they thought that there may be some differences that they had done it versus what the Bank of Japan had done. But really what had happened by 2009, because they were so unprepared for what was taking place, they did it almost as a last ditch resort because they had nothing else to do. So now we're following in the same path as the Bank of Japan because they think there are no other alternatives, when in fact there are, and it's exactly what you said at the outset, which is allow the market to actually find balance in all of these things.
BENNETT: Once the Fed gets caught into one of these low interest rate traps, where markets get hooked on really cheap debt, it becomes increasingly difficult from what I've seen for the Fed to normalize rates. And I think Japan knows this all too well. If you look at what Japan has been through, Jeff, what would you tell Yellen if you were able to get the opportunity to speak with her, to help her so we could as a country avoid a similar fate?
SNIDER: The first thing is they need to let the markets determine what is the correct value of money, where is stability, that she needs to understand that stability is the most important factor in all of this, not just artificial centralized stability they try to impose, but real, true monetary stability. We used to talk about things like the strong dollar. The strong dollar had nothing to do with whether it goes up or down, the strong dollar was the fact that the financial system and the economic system were stable enough that nobody went through convertibility and allowed the dollar to remain as the bedrock association of the economy. We don't have that anymore, in fact everything that the Federal Reserve does or any other central bank does is the opposite of stability. So that's where it all needs to start. We need to have monetary stability. We don't need to worry about what the Federal Reserve is debating in each and every policy meeting, that should be the farthest thing from investors' minds when they think about what they're doing insofar as their portfolios.
BENNETT: You would think it would be, but in our life, which the Fed doesn't seem to be paying attention to it, a lot of economic news is poor. Jobless claims came out last week, they spiked to almost 300,000, that's the third week in a row claims have risen. And also total business sales have been declining for two years, corporate earnings have declined too for four straight quarters, and inventory-to-sales ratios are nearly 2007 levels, yet the stock market seems that it's higher every day. It's just insane. I honestly want to know what she's smoking, because nobody could be in that kind of denial.
SNIDER: From her perspective, and I don't want engender too much sympathy for her, but what else is she going to say? I mean, she has to deny that there's bubbles, and she has to deny that markets are pricing her reality rather than the real-world reality, which is significantly different. Ever since QE3 stocks have been in a world all of their own, and it was all based on the belief that QE would work at some point in time. And for the couple of years the economy has gotten worse, but yet the belief still remains, or at least largely.
BENNETT: Why are they so afraid to send the markets into a long, overdue tailspin?
BENNETT: But it would reset our U.S. system, I mean it might even wipe out tens of trillions in un-payable debt, so one way or another we're going to have to get there. It would just allow this needed reboot. I think we've needed it ever since the start of 2009. Is that a fear of 1929?
SNIDER: Yeah, historically that's how you got out of these types of situations. You had a debt jubilee, whether it be a default in the currency or default of the debt proper. But dominant monetary theory since 1960s, and Milton Friedman said you don't do that, that you don't need to do that because if you properly control the money supply you won't have to go through the worst of the 1929-1930. Everything that Ben Bernanke did and Janet Yellen continues to do was written about in the 1960s about the 1930s. So they believe that you can't allow markets to work because the markets are the worst of the worst case. So they'd rather linger on in this quasi-zombie economy than allow markets to take place, which might be violent and messy in the short run, but in the long run it would lead to an actual sustainable recovery once balance is restored monetarily and in the financial system.
BENNETT: The end of monetarism, as we have known it, and of course this is courtesy of what the Federal Reserve has done through their literal money paradrop. I think that has forced gold to be on a tear this year, and silver. I know equities haven't done much, but the fact that the markets are still at the highest levels is just mind boggling. What is your forecast for the second half of 2016 for all of our listeners?
SNIDER: As far as gold, look, I think something significant changed in the gold market in January. January was the worst of the worst as far as the liquidation event. Inflation expectations were falling all over the world, oil prices were crashing, all that stuff. Yet gold rose, and not only did it rise throughout the worst of the events, it has largely remained at that level. So that to me suggests a significant change in the underlying fundamentals for gold as far as, and what we were talking about, views and beliefs in central banks and monetarism. So I have to think for the rest of the year I think there's tremendous support for the gold price. Now, gold is inherently volatile no matter what, but that idea and background with the recent monetarism central banking fading somewhat or significantly, that should be positive for gold prices going forward.
BENNETT: Let me ask you, even with what gold and silver has done, it's obvious they're the frontrunner this year, and for reasons that everyone is seeing in their own personal lives and their business lives, even with the disruption we're having with our government. Why are there so many experts still out there trashing gold and silver as an investment? They call it a pet rock and a dumb investment or relic, you've heard all the words, I'm just wondering do these people even bother doing a research or they just stock shelves?
SNIDER: It's the same reason that economists keep going to monetarism. It's the fact that it's the dominant paradigm and it's a logical fallacy where it's the appeal to authority. And because the dominant orthodox economists in this country and around the world are against gold because gold represents severe constraints on their ability to do what they want to do, they have to argue that gold is worthless and that it's not even worth anybody's time investigating. So it's really about the mainstream hold that orthodox economics has on not just economics or even monetarism but even economic commentary.
BENNETT: Jeff, can you please let our listeners know how to get to your research?
SNIDER: Sure. I publish at various places around the Internet, starting with my own website alhambrapartners.com. I have a weekly column at realclearmarkets.com. I am syndicated on NewsMax and various other places.
BENNETT: Jeff, thanks for being on the show.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Dawn Bennett provides individual investors, corporations and foundations with holistic investment strategies. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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