Observations

Thank you AAII and NAIC.  I had a lot of fun, as usual. I always enjoy discussing my charts and outlook of the financial markets.

The audience was particularly intrigued when I suggested that the Fed has more a role of umpire than trendsetter. In other words, they make sure that the US banking system remains viable. In order to achieve this feat they make certain that changes in interest rates, which are solely driven by the markets, are orderly.

It would be very disruptive for the whole system if, for instance, short-term interest rates would fall from 5% to 1% one day and than jump to 4% the next day. The Fed tries to understand the strength of the economy and then smoothes out the vagaries of the marketplace. It is not an easy task.

If they feel the system needs extra liquidity, they provide it in order to cushion any economic weakness we might experience, as it is happening now. But they still follow the market. They do not establish a trend.

Investors are always baffled when I discuss the chart showing the volatility in liquidity we experienced since 1955. A boom or a bust has inevitably followed a jump or decline in the growth of monetary aggregates. The Fed knows that. We know that. If they were so powerful, then why have they not found a way to avoid the pains that such volatility in liquidity has caused after so many decades? The answer is very simple. They cannot do it. (More on this subject can be found on my website http://www.peterdag.com/).

(This Observations appeared in the 6/25/01 issue of The Peter Dag Portfolio).

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.

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