Federal Reserve Critics

There always has been anger against the Federal Reserve. The idea of a quasi-government agency, the head of which is appointed by the president, independent of congressional influence, has always been suspect.

                       

The role of the twelve regional Fed banks has also been questioned. They are overseen by private-sector boards of directors, composed mainly of commercial bankers. That never pleases the Left.

Dodd-Frank financial regulation has, in effect. tilted the influence on the Fed in many ways, giving the executive branch of government much more power that it ever had.

                       

Recent actions show a bias toward administration easy money policies that foster inflation that the fed is supposed to help counter. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Media Exaggeration

               

       

The media exaggerate with high-tech distribution of news, as they did when they sold only newspapers in what we still refer to as days of “yellow journalism.”

                       

That’s not just when it comes to sex and  politics. It includes members of the financial fraternity.

                       

One example: When  Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem in the financial media.

                       

Investigators believe the total sum involved was actually closer to $17 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their needs.

Other exaggeration often has to do with the ongoing moods and sentiments of the markets.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Needed Credit-Default Swaps Market

Credit-default swaps got a bad reputation for a faulty political-scapegoating reason during the 2008 financial debacle. Yet, they are still being used, because they serve a useful, legitimate purpose.

                       

The problem with credit-default swaps is that the market is little understood. It provides a form of insurance that bonds will pay off, particularly when the bonds are being issued by governments whose credits are very shaky

                       

Without them, countries on the brink of bankruptcy such as Greece and Portugal, Spain and Italy, would have problems selling their bonds at any price. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Using the Duration Principle With “Junk” Bonds

 Comments are always timely on how professionals in the financial industry constantly get the bond market wrong. The media does a poor job on this subject.

                       

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields. If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in risk.

                       

If the default rates of the holdings were to rise to an unusual high from lower level, the higher yields would more than make up for the risk. Yet, all the media will discuss is the risk of default and not the built-in compensation.

                       

I have previously commented how the media hardly discuss how you can avoid that loss, along with any inflation hit, with proper use of bond duration.

                       

This is possible with low-cost mutual funds and use of dividend reinvestment. The media, instead, offer superfluous discussions about such instruments as TIPS to avoid inflation hazards, which are expensive and not needed. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

How Many Financial Advisers Are Really Qualified?

Is acquiring formal, expensive  finance advice essential, if anyone can learn quality basics on his own without too much effort? Particularly if an investor feels he must hire an adviser to solve what he feels are the complexities of investing?

What is it that makes advisers so expert? Is it the passing of an exam which purports to cover all of what there is to know about finance?  Can this be learned by anyone without too much effort? The answer is yes.

Do those fancy letters after an adviser’s name mean real expertise that makes a difference? Not many are really qualified to earn their keep.

Bottom line: Does it pay to spend 20% and more of your annual investment income to get that advice? My suggestions are for investors to learn the basics and avoid expensive advisers who contribute little for the costs they impose. 

Lawyers and accountants may be needed but not advisory meddlers. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Professionals Often Stumble With Corporate Bonds

 Professionals in the financial industry constantly get the bond

market wrong. Note: I’m referring to so-called experts, not amateurs.

                       

They make up well over 80% of the market so they should know

better. And the media are usually also in error, when reporting about them.

                       

At the first sign of economic problems, there is talk about corporate defaults and the effect on the bond market. How bond prices are bound to fall because of the risk of possible defaults. And with that talk, the bond market weakens and prices do fall.

                       

But remember: The possibility of default is very quickly factored into bond prices. And the lower the price, the higher the yield, as a direct relationship.

                       

Furthermore, the media hardly ever discuss how you can avoid loss, along with any inflation hit, with proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Fed and its Humphrey-Hawkins Conflict of Interest

Independent-minded economists have always come to the Fed’s defense, in its attempt to keep the Federal Reserve as free from politics as possible.

                       

But the Dodd-Frank Act has made the Fed less independent of the executive branch of government.

                       

Despite the logic for the Fed’s independence, Congress itself always has wanted to impose some influence. It has to an extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, known as Humphrey-Hawkins. That conflicts with the Fed’s stated currency/inflation activity.

                       

The Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias, and not one of dollar stability; so there is always a conflict of interest. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)