Home About Archives RSS Feed

The Independent Investor: How The Fed Beat The Market Last Year

By Bill Schmick
iBerkshires Columnist
Much has been made of the $78.9 billion profit that the U.S. Federal Reserve Bank made last year. All but $2 billion will be transferred over to the Treasury. It is a lot of money but in terms of return on capital it is less than spectacular, a mere 2.6 percent.

The Fed's net income was actually down from a record breaking $81.7 billion profit in 2010 on its $2.9 trillion investment portfolio. Still, they did better than the S&P 500 Index, although not as well as the Dow last year.

The real question is how much risk the Fed is taking in relation to return. It appears that on the metric the Fed is taking on more and more risk to generate a return that is under the "riskless" 3 percent return of a 30-year U.S. Treasury bond.

Take the mortgage market, for example. Over the last three years, The Fed has bet $1.25 trillion that its efforts could turn around housing in America. That bet hasn't panned out. Since they started buying mortgage backed bonds in the beginning of 2009, the value of the housing market has declined 4.1 percent.

Rather than pull in their horns, the Fed is buying another $200 billion more in 2012. That amounts to 20 percent of all new mortgage loans. That may just be a beginning, if you can believe some Fed officials. They indicate the central bank could buy two or three times that amount.

The Fed normally makes its money from interest earned on U.S. Treasury bonds, federal agency debt and securities held by firms such as Fannie Mae and Freddie Mac. That sounds tame enough, but that is not the entire story. By the nature of its charter, the Fed is supposed to deal in risky assets from time to time. Like Star Trek, their mission may be "to boldly go where no man has gone before."

The Fed is a classic buy at the low investor lending money and investing when no one else will. During the financial crisis, when banks, corporations and even countries were experiencing a free fall in prices in all their financial securities, the Fed was the buyer of last resort.

Yet, today, even some of the most sophisticated Americans have it in their head that the Fed uses taxpayer money in its operations. Even the Wall Street Journal reported in a recent story, "Fed's Lofty Profit Becomes Treasury's Gain" that "The central bank has come under attack for taking too many risks with taxpayer money ... ." The facts are that the Fed actually contributes to the pool of taxpayer funds and will continue to do so whenever possible.

Since the Federal Reserve Bank has the power to create money, it does not need to borrow money from, or use taxpayer money. Sure, the Fed might lose money at some point if inflation suddenly spiked and it needed to pay higher interest on bank reserves. If things really got messy and it needed to sell some of its government bonds, it might suffer a loss but those would be, at worst, temporary issues.

Remember, too, that the Fed is both a buyer and a seller with a far longer time horizon than the markets. Its mission is to administer interest rate policy and insure that unemployment does not get too far out of whack. As such, it creates and controls interest rates to a large extent and can create over time an economic environment conducive to those goals.

There is a reason that investors worldwide don't bet against the Fed. Although profits are fairly far down on the list of the Fed's agenda, because of the nature of their objectives, it is more than likely that they will turn a profit as long as they continue to buy low and sell high.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.


0 Comments
     
News Headlines
Williamstown-Lanesborough School Bus Routes 2016
Pittsfield Fire Department Says Lenco Has Too Many Vehicles On Site
Berkshire Healthcare Communities Earn 19 National Awards
Southwestern Vermont Health Care Employees Donate 170 Backpacks to Local Students
MCLA Announces Diverse Incoming Class of 2020
Williamstown's Beloved K9 Blue Dies at Age 12
'Playing With Fire' Merges Music, Mystery With Flair
Make the Most of Gifts to Grandchildren
Holiday Hours: Labor Day
Democratic Senate Candidate Participate in Pittsfield Gazette Debate

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (208)
Independent Investor (289)
Archives:
August 2016 (5)
July 2016 (7)
June 2016 (7)
May 2016 (5)
April 2016 (7)
March 2016 (8)
February 2016 (5)
January 2016 (5)
December 2015 (6)
November 2015 (6)
October 2015 (9)
September 2015 (7)
Tags:
Europe Debt Deficit Markets Selloff Rally Bailout Election Stimulus Greece Congress Commodities Taxes Stock Market Europe Wall Street Economy Energy Banks Euro Stocks Debt Ceiling Recession Retirement Crisis Housing Japan Currency Fiscal Cliff Oil Pullback Metals Federal Reserve Interest Rates Jobs
Popular Entries:
The Independent Investor: Don't Fight the Fed
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: QE II Supports the Markets
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: Will the Municipal Bond Massacre Continue?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: How Will Wall Street II Play on Main Street?
Recent Entries:
The Independent Investor: The More You Look, The More You Lose
@theMarket: Fedspeak Occupies A Dull Market
The Independent Investor: Health Savings Accounts a Good Idea
@theMarket: Three in One
The Independent Investor: Why the Nation's Productivity Matters
@theMarket: Markets Need to Digest Recent Gains
The Independent Investor: Candidates & the Economy
@theMarket: Markets Make Hay
The Independent Investor: Tax Breaks For College Savings
@theMarket: Historical Low-Interest Rates Prop Up Equities