i saw it again yesterday: "We are in a Fed-induced bubble. It's all a big joke." I have to tell you I just hate this stuff. It's the grist of short-sellers, not prudent stock owners, because if you believe that we are in a Fed-induced bubble, then we have been in one ever since Ben Bernanke started cutting rates after he destroyed the economy by endlessly raising rates right into the cliff that was the Great Recession.
I think people do not seem to understand that the Fed doesn't want to destroy Main Street or Wall Street. I don't think this Fed cares about stocks much at all. It does worry about Main Street, but it had the wrong worry: inflation not deflation. After all, the consumer price index did go negative in December, and the Fed wanted to raise three more times. That was, alas, ridiculous.
I can't stress this point enough: I simply do not hear enough people say that at the beginning of October we were about to have a Fed-induced recession. The stock market simply signaled, along with the bond market, that it was going to occur.
The gripers who believe the "bubble" thesis, though, will never be appeased. They just don't want to accept the fact that we can be a growth nation, a real growth nation, provided that the Fed lets it happen.
Why is this so important? Because the biggest long-term worry for everyone has to be the budget deficit, and the only way we are going to have even a remote chance of solving it is to cut spending and grow our way out of it.
I simply do not see the tax code getting us there, even if you ask the billionaires to pay more of it, even if you stop the big tax break for the rich -- the capital gains tax, which, I believe, should be taxed like ordinary income because you don't even need to do anything other than buy a stock to get a capital gain. Most people in the country don't buy stocks either, because the asset class has failed many with its capriciousness or because they have don't have enough money to save.
I don't know a soul who feels government spending is under control. The health care costs are insane and never seem to be able to come down. They are just such a huge part of the problem. I think the corporate tax cuts have fueled an employment boom that's unrivaled and would be far more acknowledged if it weren't for the toxic brew of Washington. That boom can grow receipts, which is a key hedge to the deficit.
But one thing is certain: The Fed may not be able to keep us out of a recession if we slow down a lot, but it sure can throw us into one. A recession would send the deficit zooming to the point that it could really destroy the positive impact of the cuts.
Which brings me to a central point of the debate: I can't tell you how many hedge fund managers over the years have stuck by the thesis that rates should be much higher but the Fed won't let them be. I think this is a laughable argument. Our long rates should be higher -- not the short rates -- because of the press of the deficit.
But they aren't, I believe, because of bond buying from Europe and Japan and the savings from our own citizens who have left the stock market, as well as the dramatic corporate issuance decline -- off 19% in the fourth quarter -- that leaves fixed income seekers no choice but to buy U.S. Treasuries. Otherwise, when you think about the mass liquidation by the Chinese -- they owned 14% of our bonds in 2011, now they own 7%, according to the Wall Street Journal -- you would almost certainly believe rates should have gone up.
The hedge funds who want the Fed to take up the short end to pop the bubble should really be saying the long end, which is not controlled by the Fed, should go higher -- unless they truly wanted to cause a recession. But the hedge funds can't create borrowers so they key on the Fed.
So, let's do this. Let's take off the table that the Fed induced this alleged boom. It's been fueled by lower taxes. Let's put on the table that we had a Fed-induced bear market back in December, fueled by the chief's imprudence. And let's question the sanity and selfishness of those who would want a recession because their short book and poor performance needs one to beat the S&P.