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.

News Headlines
Moulton Clan Grows Thanksgiving Football Tradition
Reid Middle School Class Throws Thanksgiving Feast
North Adams Officially Begins The Holidays
North Adams Firefighters Deliver Turkeys to
Tree Lightings & Holiday Events 2015
Mount Greylock PTO, NBCC Hosting Forum on Youth Substance Abuse
2015 Bazaars & Craft Fairs
Williamstown Planning Board Narrows Focus for Waubeeka Zoning Change
North Adams Sees 4% Tax Rate Hike; Average Bill Up $65
Lanesborough Sets Tax Rate, Extends Town Administrator Contract

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.




@theMarket (186)
Independent Investor (255)
November 2015 (5)
November 2014 (1)
October 2015 (9)
September 2015 (7)
August 2015 (7)
July 2015 (6)
June 2015 (8)
May 2015 (6)
April 2015 (8)
March 2015 (6)
February 2015 (7)
January 2015 (9)
December 2014 (7)
Recession Japan Retirement Stocks Euro Debt Housing Fiscal Cliff Interest Rates Commodities Congress Currency Election Crisis Federal Reserve Fed Taxes Europe Pullback Metals Banks Jobs Selloff Markets Bailout Energy Economy Oil Debt Ceiling Rally Deficit Greece Stimulus Stock Market Europe
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: Financial Media May Be Your Worst Enemy
The Independent Investor: How 'Black' Will This Black Friday Be?
@the Market: Buy the Dip
The Independent Investor: 'Bag Lady' Syndrome and You
The Independent Investor: Social Security & the Budget, Part II
@theMarket: How High Will We go?
The Independent Investor: Budget Deal Craters Social Security Strategies
@theMarket: Regaining the High Ground
The Independent Investor: Water Scarcity Not Only California's Problem
@theMarket: The Worst Is Over