< Back to JVM's Blog

Is The Fed The Wizard Of Oz (Powerless)? Why It Matters

Is The Fed The Wizard Of Oz (Powerless)? Why It MattersIn the iconic movie The Wizard of Oz, all of the characters thought the Wizard was an all-powerful being who controlled everything and everyone.

But, in the end, we found out that the infamous Wizard was really just an old man behind a curtain playing tricks with loudspeakers, smoke and mirrors.

RENOWNED RESEARCH ANALYST SAYS FED IS POWERLESS

Jeff Snider is a renowned market analyst and the head of research for Alhambra Investment Partners, and the host of one of my favorite podcasts – Making Sense.

Mr. Snider believes that the Fed is just like the Wizard of Oz – with much less power than any of us might think.

This is b/c the vast worldwide “Euro-dollar market” is so huge and so much more powerful than the Fed that it can and will influence rates irrespective of what the Fed says or does.

So, yes, the market does move in response to Fed statements on occasion but that is only b/c many investors have not yet figured out what Dorothy did in the Wizard of Oz and what Snider has figured out in the Wizard of Fed 😊.

Hence, market movements in response to Fed statements are often temporary and invariably overpowered by the Euro-Dollar Market (referring to all dollars and currencies outside of the U.S that slosh around daily).

I won’t bore anyone with specifics (mostly b/c I don’t fully understand this myself 😊), but suffice it to say this market is gargantuan and beyond the Fed’s control.

In the most recent Making Sense podcast, Snider points out that the famous Taper Tantrum of 2013 (when the Fed announced it would stop buying bonds causing rates to shoot up) was really not the result of the Fed’s announcement at all. It was in fact just the Euro-Dollar Market reacting to the same conditions the Fed was (an apparently recovered economy).

“The Wizard of Fed,” however, still wants us to believe it was entirely the Fed that pushed rates up in 2013.

RATES STAYED LOW AFTER WWII NO MATTER WHAT FED DID

I might add the host of another favorite podcast of mine, Macro Voices (hosted by hedge fund manager, Erik Townsend), often implies the same thing. In his most recent podcast, he pointed out that bond yields stayed low for ten years after WWII no matter what the Fed did, and that could well happen in our current environment.

WHY DOES THIS MATTER?

  1. New Taper Talk Irrelevant. The Fed is still buying bonds en masse to keep rates low, and there is much talk of tapering (slowing bond purchases) again. But, per Snider, tapering will have little effect on rates. So, we can all stop panicking about tapering.
  2. Buyers and Borrowers Unduly Concerned About the Fed. We often speak to buyers who have cold feet b/c they are concerned about Fed policy and what the markets might do, e.g. “will rates go up and tank the housing market?” So, it may be helpful to share this blog or the Making Sense podcast with those borrowers.
  3. No Power in Recession. B/c the Fed is now so powerless for a variety of reasons, the next big recession could well be a doozie of lifetime proportions – so we all might want to remember to keep our powder dry, e.g. saving cash and living lean.

The Fed might be wise to remember too that the Euro-Dollar Market is just like the Honey Badger – it don’t care.

The markets are gonna do what the markets are gonna do – no matter what the Fed says or does.

And nobody really knows what will happen, but it does appear that Mr. Snider has a better understanding than most and I HIGHLY recommend his excellent podcast.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

Tags: , , ,

Get in touch with us

Guaranteed 60-minute response to emails and voicemails during operating hours.