Michael A. Gayed, CFA

About the Author Michael A. Gayed, CFA

Michael A. Gayed, CFA, winner of the 2014 Dow Award and 3rd Place Wagner, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies. Prior to this role, Gayed served as a portfolio manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. From 2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered investment advisory firm that managed equity portfolios for large institutional clients. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Follow him on Twitter @pensionpartners and YouTube youtube.com/pensionpartners. He has re-released his father's 1990 book Intermarket Analysis and Investing, now available on Amazon.com.

A Letter To The Fed: Please Stop Talking

Dear Fed,

We have come to a point in time where you are causing more harm than good. For decades, your role as not only the central bank to the US, but to the entire financial world helped ensure confidence in a fiat economy. Central control of a nation’s monetary system is undoubtedly an incredibly important role. You know this. After all, you were created in 1913 in response to systemic banking crises and failures in the years prior. You were created to prevent crises from happening.

Damage control was always key to your central mission from the very start, achieved through the “dual mandate” of maximizing employment and stabilizing prices. However, in time you became much more than the organization which was tasked with controlling monetary policy. Rather than respond to shocks, you actually became the reason for shocks by believing you had so much power that you could control boom and bust cycles. More importantly, you believed you could predict the future by creating it.

It doesn’t take much analysis to prove that you have no control over the future. While your former Chairman, Bernanke, claimed to have the “courage to act,” somehow all of the tomes of economic research and analysis, and all of that belief that you had control caused you to completely miss the housing bubble and conditions that led up to one of the greatest economic crises since your very founding. While you can deny this all you want, video interviews by Ben Bernanke clearly prove otherwise (click here to jog your memory). Words matter.

The very fact that you, as an institution, come across so definitive in your omnipotence is wildly damaging to long term wealth creation and the stability you are supposed to create. How many of the herd blindly believed Bernanke’s words? Kept taking risk? Kept believing that if things went awry that the Fed would be able to swoop in and save the day? How much wealth was lost not because of the crisis, but because of the complacency your words created by human beings who crave the illusion of certainty and simply want to believe? The mantra of “don’t fight the Fed” has lost more money for investors than realized despite the selective application of that saying to bull markets.

It does not matter than the S&P 500 (NYSEARCA:SPY) has come right back since the Tech wreck and housing bubble. A significant portion of the investment public has not seen their wealth recover because of classic “buy high, sell low” actions. Buy and hold is a fantasy when it comes to extraordinary volatility and when fear is at its maximum. Yes, you deserve credit for “saving the system” but you did not save wealth. On the contrary, since the crisis the wealth gap has only widened as zero interest rate policy and Quantitative Easing benefited those who probably needed it the least.

Now of course, I am not saying you have ill intentions. But last week is a classic example of the ridiculousness of your communications. It seems like every time one of your representatives comes out with a statement that sounds dovish, another comes out barely 30 minutes after sounding hawkish. You create such absurd confusion and do so with such a strong tone that you harm long term investment formation. You harm long-term confidence because the more you forecast, the more obvious it is that you just can’t get the future right (no one can!). Stocks manically rise one minute, then manically fall the next. You create the noise that causes investors to not trust markets.

No different than Bernanke over-communicating that there were no signs of a housing crisis, you continue to over-communicate now about when you will raise rates. You have created so much conversation around your own conversations that it results in not only an enormous waste of time, but also invalidates nearly all security analysis. Who cares about earnings, revenue, or company growth when the only thing that matters is what you say next.

You are once again creating complacency with your words. You are creating one of the greatest misallocations of capital in history as performance chasing investors plow into passive market-cap weighted indices because of your policies which have destroyed the normal functioning of markets through volatility suppression. The more you talk, the more you create one class of investors who take extra risk, and another which sees the market’s response to your words and then themselves decide to not even participate. This is damaging to our society. This is damaging to our culture. This is damaging to our psyche.

Rather than constantly seeking the attention of the media, and continuously commenting on a future that you can not control, please just stop. Your greatest weapon always has been the element of surprise. The more transparency you attempt to have, the more confusion and complacency you will create. You are once again laying the groundwork for a crisis – one which we will only realize after it is underway. Stop with the constant dot plots about the unknown. Stop providing a false anchor for investors who hang on every word you say.

Please, just stop talking.


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