Washington, DC -- (ReleaseWire) -- 11/03/2014 --Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on October 26, 2014 interviewed Howard Gold, MarketWatch Writer and editor of The Golden Egg Investing.
Mr. Gold recently wrote about the documentary “Money for Nothing,” which gives view ers an inside look at how the Federal Reserve operates.
Here is the interview with Mr. Gold:
BENNETT: Will the Fed let the stock market crash before an election or do you think they're actually going to attempt some type of controlled collapse?
GOLD: Well, I don't think the stock market is going to collapse before the election. I think we've seen a rally. I think we probably hit the lowest and I think that was a correction not a market crash. I think it may take the Fed a little longer than people expect to start raising rates. I think that's going to be the next challenge.
BENNETT: I think they only have a billion dollars to inject into the market. How is this market actually going to be able to sustain itself?
GOLD: I think the Fed has had some well-timed infusions of quantitative easing after market correction, which I think is pretty interesting. I think that has definitely supported the market but I also believe that the economic recovery is real. I think unemployment has fallen quite a bit. I'm doing some research for another piece so I'm looking at various cities. A lot of the cities that were hit hard are coming back. So, I think we had a slow, probably not acceptably vigorous recovery, but I do think that is underpinning the stock market along with the zero interest rates.
BENNETT: So you recently wrote about the documentary 'Money for Nothing', which gave viewers an inside look at how the Federal Reserve operates. You mentioned that Yellen said she would never use inflation to finance the deficit. But isn't that exactly what she's been doing. She insists on 2 percent inflation every year.
GOLD: I'm not sure 2 percent would actually finance the deficit. First of all, the deficit as a percentage of GDP has been shrinking dramatically over the last few years, not that it's not too high, I still think it is. I don't really think in their minds what they're doing is financing the deficit. I think what they're doing is trying to fulfill that mandate, that difficult mandate the Congress gave them, a double mandate of primarily actually focusing on employment, but secondarily on inflation. I think they've been primarily focusing on employment. I think what happens when the market goes down is it scares them, and they go in and try to build things out of it, and I think that's been going on and off for the last 25 years. I think that's where they really go wrong. I think it's been quite a mission creep at the Fed since the stock market crashes of 1987. I think it goes well beyond what their mandate is and that's really my issue with the Fed, that I think they've just gotten too powerful and unaccountable on key things like that, and they should really stay out of the stock market, and be really focused on what their mandate is, which is to prevent the depressions, if they can, and to prevent runaway inflation if they can. That obviously secures financial stability and that's what most central banks have done in the world for the last 150 years.
BENNETT: &nb sp; You said that they get involved. They step up and they start building things up. Can you give us a bit of information and are there any interventions you've seen that can only be pinned to down to a Plunge Protection Team?
GOLD: I've read things about the plunge protecting, and it apparently started from a certain commission that President Reagan started in 1988, which consisted of the Fed Treasury Department and some others. I think the long-term capital management was a crisis that I think they essentially bailed out this hedge fund and the New York Fed got Wall Street firms to put up the money to bail out the hedge fund and it really just made a lot a bad bets. Of course in 2008 they took a lot of extraordinary steps. I don't really see evidence that there is actually a real Plunge Protection Team that sits together and works out some things like that. I just think that when crises the Fed reacts in way to try to staunch the bleeding or to prevent the worse because they're all terrified of another Great Depression. That's the lesson. There was a famous time when Ben Bernanke attended Milton Friedman’s 90's birthday party at the University of Chicago a few years ago. He was Fed governor at the time, not the chairman. He said, 'Milton, we apologize. We made a bad mistake and we won't do it again.' I think that is really on a lot on their minds. I think they're really terrified of the repeat of Great Depression when the Fed did not in fact loosen the money supply, but tightened it after the crash of 1929.
BENNETT: But how do these types of interventions actually affect the average investor? Presumably, people don't really complain too much because their interventions are intended to prop up the market, but that’s artificial and there are savvy investors out there that are trying to short the market as they should because fundamentals aren't there…yet losing because of the Fed rigging that is skewing the market.
GOLD: Well I disagree. I really think the fundamentals are there, earnings have been doing very, very well. I think the growth in the United States, while weaker than in previous recoveries, is certainly better than it has been in the rest of the developed world, and even a lot of the emerging markets. I think people who have shorted the market or who have gone all into gold have made a very big mistake and they have lost out on a lot of opportunity to make money over the last few years. What I suggest is that in a high-risk environment like this, people keep less of their money in stocks than some advisers recommend. A lot of the traditional advisors recommend 60 to 70 percent of stocks. I recommend 40 or 50 percent, because that limits your losses and keeps you in the game, because 70 percent of the time stocks go up. That's been proved through history.
BENNETT: Yes, but when you talk about things that are actually better out there, let's focus on the housing numbers which were very poor this week, or even McDonald's and Coca-Cola for example -- their global revenues fell 5 percent and then even their net income was some 30 percent lower. Companies like Unilever are saying the consumers around the world, just aren't there. It's just so tough out there!
GOLD: I think you're making some good points, if the consumers are weak. I do think other companies have reported great earnings. I mean you had Boeing had greater earnings, you had Intel had great earnings. The issues you have identified are correct. The consumers have certainly been hit very hard, there will still be leveraging going on. The affluent consumers are doing fine and they're spending but it's probably not enough to get the recovery up to a 3 to 4 percent GDP as opposed to 2 to 3 percent GDP.
BENNETT: I always wondered how people come about to their earnings. For examp le, Caterpillar came out in the media and said it was great, right. They had great earnings, but they had some unusual exclusions with restructuring costs that actually added back some 9 cents to their bottom line number, so it really wasn't as good as it came out to be.
GOLD: I've been covering business for many, years and companies have done this all the time, and they are very good at it. I think what people have to look at if they own individual stocks, which are not my preference I really don't generally own individual stuff nor recommend it. People really have to read& nbsp; financial statements very carefully because a lot of times it is smoke and mirrors and you have companies that don't have strong revenue growth and they're doing it through stock buybacks, they are doing it through all kinds of other financial engineering rather than through real stuff.
BENNETT: Right, then these companies are borrowing money for stock buybacks so that's not necessarily a healthy thing. So back to just trying to let things be the way they should be - a free market system, is there something to be said for simply just letting the market reflect its accurate prices based on supply and demand? Since the Fed isn't exactly investing real money, how do these interventions actually affect price discovery, which I think is an important function?
GOLD: I wish I had the answer for that, but I don't know. I mean they have helped investors, but I think as I said in my column, my MarketWatch column last week, the emergency is over. We have 5.9 percent unemployment in this country. Yes, there is a lot of underemployment, there is little work force participation for a number of reasons, but this is no longer a financial emergency. It hasn't been probably since the European debt crisis and it pretty much ended a couple years ago. So I think the way they ended it, they stopped the QE, they started raising interest rates gradually to reflect a mild economic recovery, and then they begin to sort of pay down some of the extra reserves they've accumulated in banks. It was like for $3 trillion in reserves over the last few years, and begin to wind that down too. It would be actually more bullish for the stock market in the long run and give a lot more people confidence. Up to a certain point they help, like in 2008-2009, but as you go far beyond that, I think they will have unintended consequences.
BENNETT: I do agree with you that in the long run to get all that back to normal and stopping the QE will work, but I'm just wondering, we're getting close to an $18 trillion debt that's due. We have unfunded liabilities and I know you say unemployment is getting better but the unfunded liabilities are like a $ 116 trillion. I keep asking myself how in the world can we pay this off? Even the social security administration came out last week with a wage statistic report and they are saying that 50 percent of all American workers made less than $28,000. That's not healthy. That's not good.
GOLD: I agree with you.
BENNETT: That's actually a sign that our quality of life in America is getting worse.
GOLD: No, I agree with you. I think we have a lot of problems with the wages. There's been no wage growth in this country and I think that’s heading to the issue, the big issue of economic inequality. Companies have not felt the need to raise wages. I think on the flip side of that, I think that makes it much less likely we're going to see inflation like we did in the '70's, which was largely a factor of increasing wages. So, yes, I think there are serious problems. I'm very troubled b y some of this and I would like to see some policies coming out of Washington, some sensible policies that encourage people to get better skills, or give companies incentives to hire people. I guess get a better control over the fiscal situation. I think in the long run, the big problem coming down obviously is baby boomers like me retiring.
We can pay in and now suddenly we're going to start taking out and the fact is people say, oh I paid in for this. But they're going to be taking a lot more after they paid for it on average and most of the studies show that. So in the long run, I think it is a big problem. I'd like to see Congress find some sensible ways to address that and I'm very troubled by the fact that they can't even agree on anything at all.
BENNETT: Right. You’ve written that Janet Yellen's primary mandate at this point is boosting employment. I just read you the statistic that shows us the quantitative easing actually isn’t helping the majority of Americans out there.
GOLD: It is not.
BENNETT: Can the Fed actually create employment by adjusting the money supply or is that just a theory that's constantly being tested and failing over and over again?
GOLD: I think you're right. I think constantly being tested. The Fed itself did a study on what the effect QE was, and I think it was back in 2012. They found it produced 2 million jobs. The Obama stimulus, economists found it produced about two million jobs and I did a piece on the Bush tax cuts that they probably produced about 2 million jobs too. That's not a lot of jobs in this economy especially for the cost, especially for the amount of money that was spent. It's a very, very low yield in all those cases. What I tell people, I don't think government policies create jobs. I think what government policies, central government policies would do is improve our infrastructure where it's needed and give people incentives to get better training, their skills can build up so they can get jobs and get higher pay for it and start businesses themselves.
BENNETT: So if Janet Yellen or the Federal Reserve is actually waiting for the employment to pick up -- which in reality it's not happening-- before quantitative easing is officially ended, do you think we're going to get QE5 on Wednesday?
GOLD: No, I think we are going to end QE. She is going to end it. I think they are going to wait a while on increasing interest rates and I think she's goi ng to watch and wait until unemployment gets low -- official unemployment gets to the low of '05. I think we're going to see slightly higher rates late next year but I don't think they're going to move up regularly. I think they're going to take their time increasing rates a quarter at a time. I think she's really smart and she knows that this is not sustainable for the long run. I think she is actually going to surprise people and raise the rates, but very gradually.
BENNETT: Yes, I'm going to wait to be surprised. I don't think she's as smart as you make her out to be. My big question is what's going to hold the market up after Wednesday?
GOLD: We are just going through an interesting test now. People said for about a year that the tapering is tightening. That hasn't been the case. Let's see what happens. In the market, they'll always find something to worry about. I think the next thing they're going to start worrying about is when rates start rising. I think the rates will start rising a little later than people expect, but I expect to see the market rally. I do expect to see some challenges when rates begin rising because the great Martin Zweig used to say, 'Don't fight the Fed,' but he also said that when we get to the second rate increase that's when you start thinking about taking some profits.
BENNETT: They haven’t had the backbone to end quantitative easing for the last couple of years, so I am wondering if instead, they come up with some reason to continue to doing it. It certainly would destroy their credibility, but I just don’t think they have the backbone to pull it off.
GOLD: I think they are on the course. If she doesn't, it will hurt her credibility more. I think they have been scared with the stock market, but then again, the S&P is just 50 points shorter than all time high now. So we had a tremendous rally over the last few sessions. If the stock market continues to fall, maybe to 50 percent down, 20 percent down, then I think it is possible that comments would have been kind of foreshadowing. Right now, I expect them to end the program, but I don't expect them to raise rates for a while.
BENNETT: What do you hope happens this Election day?
GOLD: I hope we elect people who are actually going to stop throwing smoke around and really start working together to address the real problems in this country. I have criticisms of Democrats and Republicans and I think a lot of their behavior in the Congress is childish. I think we have very serious problems and I would like to see the game end and more c onstructive action taken. I think the country really needs it.
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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. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org