A-Rod for Fed Chair

The Fed is on Economic Steroids

Written by Jimmy Mengel
Posted August 12, 2013

New York Yankees' superstar Alex Rodriguez is now completely disgraced.

His crime: pumping his body with artificial substances in order to juice his numbers and mask his declining abilities.

Sounds awfully familiar to an infamous American institution...

Ben Bernanke has been doing precisely the same thing to the Federal Reserve since 2009, juicing the economy with artificial stimulus to hide the underlying decay of its naturally declining strength. 

As we all know, reality eventually catches up.


ben on steriods"You wouldn't like me when I'm angry... "

The reality is if Alex Rodriguez had stopped taking human growth hormones, he wouldn't be able to justify his massive $30 million-a-year contract.

In fact, he may not have even had a job in the first place.

After baseball became suspicious of his new round of “stimulus,” Rodriguez's performance started to tank. If you watched him in the playoffs last year, it was even uglier than the stock market crash: He batted .120 with zero homers and struck out in nearly every other at bat. (For those of you who aren't baseball fans, those numbers are horrible.)

If the market stopped its dose of stimulus, its numbers wouldn't be much better...

Just look at what happened when Bernanke merely hinted that he might be putting the economic growth hormones away in the coming months:

^DJA Chart^DJA data by YCharts

The Dow Jones Average plummeted 206 points — 1.35% in one day.

All 30 DOW components finished with losses. The S&P whiffed big, too, shedding almost 23 points to take a 1.39% loss.

During the same month, the Volatility Index (VIX) — the best measure of fear in the market — hit the highest trading volume in the entire history of the exchange.

That doesn't look like a confident market to me.

With quantitative easing, like any other drug, you need more and more to get high. It's called chasing the dragon. 

Even former Fed Chairman Paul Volcker admitted as much when he said QE's “beneficial effects… appear limited and diminishing over time.”

Just have a look at the markets jump after each steroid, ahem QE, injection:

As soon as performance starting falling off, the Fed injected another round into the market. And, as you can see, each time the return was more diminished...

First, we saw a 47% surge with the expansion of QE1. But when QE2 flooded in, there was a more modest 10% jump in the S&P.

Eventually, after searching around for a decent vein to tap, Operation Twist and QE4 were injected and returned a mere 5%-6%.   

Zero Hedge sums it all up in one simple chart:

When I talked to Euro Pacific Capital's Peter Schiff a couple weeks ago, he confirmed as much:

The economy is so addicted to QE, that the more you maintain it, the more the economy needs to stay high. As the bubble gets bigger, the more air you need to sustain it.

So I don't think $85 billion is enough. They're going to have to take it to $125, $150, $200 billion, $250 billion... They're going to have to do it bigger and bigger. The minute they stop, it's going to implode. 

The more easing we do now, the bigger the government gets, as the national debt gets bigger and bigger. The Fed has to monetize more debt. 

What happens when the budget deficit is $2 or $3 trillion a year?

The more QE we do now, the bigger the government gets because its able to run bigger deficits, so its just more QE will have to do tomorrow to sustain it all. 

Just as A-Rod can't perform without steroids, Wall Street can't live without QE.

This is even more evident if you look at the basic underlying fundamentals... 

Juiced Numbers in the Jobs Market

One of the most obvious signals that the recovery numbers were juiced is that employment numbers simply do not support any type of recovery.

Right now, America's second largest employer behind Wal-Mart is Kelly Services, a temp agency.

Part-time jobs have reached record highs, with a shocking 28 million Americans now working part time.

According to the Bureau of Labor and Statistics, just 130,000 full-time jobs have been added this year, compared to 557,000 part-time jobs.

And the official employment data does nothing to shine light on this fact. Since most people are getting part-time temp work, they often have to work two jobs in order to make up the lost hours and wages.

In terms of data, even if one person is doing two jobs, that counts as two new jobs.

In addition, the official numbers neglect to count the poor folks who have simply given up looking for work, because the opportunities simply are not there. If you take those folks into account, the unemployment rate is around 14.3%.

unemployment breakdown

As you can see, it's yet another example of juiced numbers obscuring reality.

The Opiate of the Masses

The sad part about all of this is, while outrage over professional athletes using steroids hits the front pages of each paper and tabloid rag out there, the Fed's actions don't seem to strike the same nerve with the general populace.

If you go to a backyard barbeque, you can be almost sure that everyone has an opinion on Alex Rodriguez (and it's usually a negative one)... but ask them how they feel about the Fed's rampant stimulus abuse, and you'll likely be met with a blank or confused expression.

As Pulitzer Prize-winning writer Russell Baker says, "In America, sports are the opiate of the masses."

And that's how the powers that be want it.

They want you to direct your anger towards issues like steroids in baseball. They want you to get lost in the latest sports scandal. They need you to vilify someone else — anything to take scrutiny away from their own schemes to divvy up wealth and influence amongst themselves.

Personally, I love baseball and economics, and I despise lying or juicing in either sector.

The reality is we're getting a heaping dose in both.

If it were up to me, I'd say: "QE one! QE two! QE3 strikes you're out, at the Fed's old gaaaame!"


Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body