Judge the Fed on the Facts It Had

 | Feb 21, 2013 | 11:03 AM EST
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You want the real problem with relying on month-old Fed notes like so many are? They are a month old.

Think about it. The worry of the moment is that sequestration is going to slow down the economy. With the country taking aim at the military budget, something that has been sacrosanct except the time between World War II and the Korean War, one has to worry given that so many jobs are at stake. The discretionary part of the U.S. budget is heavily skewed to military and even though the Iraq war is over and the Afghanistan war is winding down -- two of the biggest short-term budget busters around -- the military has not trimmed its fat. Judging about what they are going after -- 800,000 civilian jobs instead of the huge overhead of generals and projects meant to fight the Soviet Union or defend Japan and Germany -- the Defense Department's going to scare everyone in Congress. No matter that my old pal and partner Larry Kudlow has a terrific piece that points out that the entire sequester harm this year will come to $44 billion, not $85 billion, in spending cuts and that's just a quarter of 1% percent of our GDP.

Then, on top of sequester, we know that the conclusion of the payroll tax holiday, the steep increases in taxes for the wealthy and the rise in gasoline prices -- one that Dan Dicker in a key video says is driven by speculators -- are all weighing on the consumer.

You layer in what people are thinking about Toll Brothers (TOL) and about the devastating internal memos from Wal-Mart (WMT) about the disaster that is Februar, and you can draw a pretty weak picture about the U.S. economy FOR THE MOMENT.

But is this the very same moment that the Fed is going to take the foot off the gas pedal? Is this the moment that they are going to bail on their plans to help the  U.S. economy?

There are two thoughts here. One is that the Fed chief is sticking by his 6.5% unemployment goal, still a percent over where we were before the Great Recession, so why should he switch now? And second, these minutes reflect more of a head-of-steam economy than we have now.

So, perhaps, just perhaps, they mean nothing and there is no plan to inflict a double whammy on the economy where the Fed stops easing at the same time the sequester kicks in or at least the worries about it head up and the housing market is on pause as people presume from Toll Brothers' comments. I just wish they would read them instead of pontificating on them.

In other words, these minutes that are causing people to flee from the market may not reflect the CURRENT thinking of a Fed that has been very forward looking about the hazards coming from Washington.

Now, have stocks advanced too fast vs. the fundamentals and can they correct? That's pretty much been the case since the great bull market began in 1982. Excessive optimism followed by a wave of pessimism. We saw it with the fiscal cliff and we saw it with the U.S. government downgrade and we certainly saw it four years ago when the theme was to nationalize the banks.

I am simply pondering whether the Fed is suddenly as stupid and as blind to the current weakness or, a month from now, perhaps when the economy actually might be faring better, we get minutes that say "newfound weakness forces us to continue our bond buying."

Judging the Fed when the Fed doesn't have the information then that we have now has been a real bad bet. Maybe this time it is different? Maybe this is the time when the Fed just totally blows it? That's what people bet on yesterday. I will choose to be a tad more circumspect before I pronounce the Fed as foolish as so many are now.

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