Monday, September 01, 2014 10:00pm
North Adams, MA now: 68 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: How The Fed Beat The Market Last Year
By Bill Schmick On: 05:28PM / Thursday January 12, 2012
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0
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
MCLA Women's Soccer Falls to Albertus Magnus
Larabee, Giorgi Honored With 'Frankie' Awards
Former Finance Director Returns to Williamstown as Pastor
Armory Takes Lead in Torchia Softball League Final
Legislative Q&A: State Rep. William 'Smitty' Pignatelli
MCLA Women's Soccer Ties; Tennis, Volleyball, Men's Soccer Win
Holiday Hours: Labor Day
Clarksburg Weighing Bridge Plans, Preparing Special Town Meeting
MCLA Men's Soccer Rolls in Opener
'Sin City: A Dame to Kill For': Graphic, Indeed
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 (143)
Independent Investor (194)
Archives:
August 2014 (7)
July 2014 (2)
June 2014 (6)
May 2014 (9)
April 2014 (8)
March 2014 (6)
February 2014 (6)
January 2014 (7)
December 2013 (8)
November 2013 (7)
October 2013 (6)
September 2013 (6)
Tags:
Fiscal Cliff Selloff Greece Commodities Pullback Stock Market Stimulus Rally Europe Metals Energy Japan Congress Interest Rates Retirement Housing Oil Economy Currency Banks Fed Election Europe Euro Debt Ceiling Crisis Recession Stocks Federal Reserve Jobs Bailout Deficit Markets Taxes Debt
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
The Independent Investor: Does Cash Mean Currencies?
@theMarket: QE II Supports the Markets
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
@theMarket: What's Up With Bonds?
The Independent Investor: Baby Boomers and Retiremen
@theMarket: Labor on Their Mind
The Independent Investor: Financing ISIS
@theMarket: Geopolitical Risk Trumps Economic Growth
The Independent Investor: Beware the Russian Bear
The Independent Investor: Why Some Corporations Are Leaving America
The Independent Investor: How Much Is Too Much to Spend in Retirement?
The Independent Investor: The Fed Turns Off the Spigot
The Independent Investor: Should You Pay Off Mortgage Before Retiring?


View All
Friday Soccer Scrimfest
Friday afternoon girls soccer 'Scrimfest' at Drury High...
Pignatelli Campaign Kickoff...
State Rep. William "Smitty" Pignatelli held a kick off...
Down Street Art
People flooded main street to see the new art installations...
Western Mass Beer Fest 2014
Hundreds turned out for the 9th annual Western Mass Beer...
High School Soccer
High School soccer practice got under way on Thursday.
Motorama
Hundreds of cars, trucks, motorcycles, snowmobiles and...
Chamber Nite @MountainOne
A who's who was at the MountainOne-hosted Berkshire Chamber...
Third Thursday Aug. 21, 2014
The August Third Thursday event in Pittsfield included a...
High School Football
High School football practice got under way on Monday.
Giorgi League Semis: B&B vs...
Burr and Burton held a steady lead over Bennington, Vt.'s,...
Giorgi League Semis: Drury vs...
Alex Heck scored 19 points to lead the Drury boys...
Mill Children Opening
The 5 Hoosac Street Gallery held its grand opening Friday...
Downtown Celebration 2014
North Adams held its annual street fair on Main Street on...
Worcester Bravehearts vs...
Key at bat helps the Worcester Bravehearts defeat the...
9th Annual Rock, Rattle &...
This year's theme is "Living in Harmony, Fulfilling Our...
Softball Series: Berkshire...
Friday Soccer Scrimfest
Friday afternoon girls soccer 'Scrimfest' at Drury High...
Pignatelli Campaign Kickoff...
State Rep. William "Smitty" Pignatelli held a kick off...
Down Street Art
People flooded main street to see the new art installations...
Western Mass Beer Fest 2014
Hundreds turned out for the 9th annual Western Mass Beer...
High School Soccer
High School soccer practice got under way on Thursday.
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved