PBS Frontline: The Power(less) Fed how to manage conflicting risks?

[Spock]

I watched this PBS Frontline episode last night: The Power of the Fed.
Originally aired July 2021. Youtube link below. Also available on PBS.org.
I did a search on this site and couldn't find any existing threads about it.

The documentary rewinds to the first rounds of Quantitative Easing (QE) in 2008 to set the stage for what is happening now in 2021.
Along the way it touches on stock buybacks, wealth inequality, and a mention of shadow banks and starts to touch on inflation at the end.
If nothing else, watch the last 3 minutes starting at 50:22 or so...

I was surprised at the candid responses from people like: former chair of the FDIC Sheila Bair, former presidents/execs of the Dallas Fed (Richard Fisher), Sarah Bloom Raskin who was on the Fed Board of Govenors, economists such as Mohamed El-Erian from Allianz, and some billionaire investors... not your typical conspiracy/tinfoil hatters.

There are a series of striking comments from people that close to the top using phrases (describing QE) like "we did it to avoid total economic collapse". Basically the tin foil hatters were/are right.

They gave considerable air time to current president of the Federal Reserve Bank of Minneapolis Neel Kashkari. Maybe it was the way the interview was framed... but if this "genius" is representative of the skills of the other Fed members, we are in some seriouly deep do-do.
He had all the credibility of a used car salesman.

The summary of the current (2021) state of affairs is the Fed is trapped. The show should have been titled "The Powerless Fed". The Fed has taken asset prices to be their indicator of economic health (meaning the system hasn't collapsed yet) and Wall Street has a siezure anytime the Fed attempts to stop bailouts or monetizing debt. One former Fed official said he feels "as anxious today as he has ever felt about the financial world" because of the way the Fed has pumped up asset prices. He gave odds of 1-in-3 that this "will be viewed as an epic mistake and one of the great financial calamities of all time".

Jeremy Grantham is quoted as "they have the housing market, stock market, and the bond market all over priced at the same time".

The show mentions that the system/market (not the economy any more) has needed exponentially larger money printing twice in the last 12 years now. As a former control systems engineer this is starting to look like a system that is starting to destabilize and starting to oscillate wildly.

So. What indicators are required to get you thinking that things are starting to wobble a bit too much for your age vs. the longevity needed out of your assets?
When does a 60/40 or 50/50 or 20/80 or whatever AA start looking like a casino as both stocks and the bonds risk towards instability?
What are your balance points between getting out of the casino, yet feeling like you need to stay at the tables in order to survive inflation?
When do you start looking for a place to hide? And where? Even if just hedging your bets vs. going all in?

 

[kevink]

Very good discussion of this program on Bogleheads.

http://https://www.bogleheads.org/forum/viewtopic.php?f=10&t=353909

 

[SnowballCamper]

So. What indicators are required to get you thinking that things are starting to wobble a bit too much for your age vs. the longevity needed out of your assets?

When does a 60/40 or 50/50 or 20/80 or whatever AA start looking like a casino as both stocks and the bonds risk towards instability?

What are your balance points between getting out of the casino, yet feeling like you need to stay at the tables in order to survive inflation?

When do you start looking for a place to hide? And where? Even if just hedging your bets vs. going all in?

(1) High inflation is my biggest long term concern...but as my living expenses are below my cola pension I'm not terribly worried. The retirement investment accounts hopefully cover the mismatch between COLA and actual inflation.

(2). This is the main reason I stick with the TSP, where the G-fund doesn't have market risk, and I use it to rebalance against the other stock funds.

(3). I'll stay in the market regardless. I learned my lesson in 2008...got out for only a week. Man, I sure won't do that again.

(4). As I'm not a market timer, there is no need to find a place to hide. I'll ride it out. If the true economic collapse happens, the necessary skills have to do with producing food and energy, not hiding money (that may or may not have much residual value).

 

[mrfeh]

So. What indicators are required to get you thinking that things are starting to wobble a bit too much for your age vs. the longevity needed out of your assets?
When does a 60/40 or 50/50 or 20/80 or whatever AA start looking like a casino as both stocks and the bonds risk towards instability?
What are your balance points between getting out of the casino, yet feeling like you need to stay at the tables in order to survive inflation?
When do you start looking for a place to hide? And where? Even if just hedging your bets vs. going all in?

Yes, both bonds and equities are expensive right now. But, what else are you going to do w/ your money? Bury it in the back yard?

Set an AA (with an allotment in ex-US equities, which are cheaper) and stick with it, and plan for returns to be muted for the next 10 years.

 

[Midpack]

Yes, both bonds and equities are expensive right now. But, what else are you going to do w/ your money? Bury it in the back yard?

Set an AA (with an allotment in ex-US equities, which are cheaper) and stick with it, and plan for returns to be muted for the next 10 years.

+1. It seems many of the investing outlook concerns discussed here offer no useful course of action. Sell everything? And buy gold? I plan to stick with my AA come what may, what has always worked in in the past if you’re patient. When/if we actually experience “this time it’s different” it will be new to everyone…

I also wonder about those who repeatedly come on and say they’re safe because of a (COLA’d) pension, annuity or the like. In an actual financial collapse (vs a depression/recession), nothing is guaranteed.

 

[Walt34]

I also wonder about those who repeatedly come on and say they’re safe because of a (COLA’d) pension, annuity or the like. In an actual financial collapse (vs a depression/recession), nothing is guaranteed.

There is that. While I am one of the lucky ones with a COLA'd pension (lucky because I certainly never gave it a thought when I applied at age 22) I am well aware that the despite the last report of 106% funding the amount is in fact finite. That said, I am only a little bit comforted by the knowledge that if I am in deep doo-doo, lots of other people will be even deeper in it.

 

[Markola]

I, for one, am glad the Fed acted in both crises. Do folks somehow think the real economy would have been better off with austerity?

These are the reasons I sleep a little better with a 50/50 allocation that is diversified internationally.

 

[JDARNELL]

(1) High inflation is my biggest long term concern...but as my living expenses are below my cola pension I'm not terribly worried. The retirement investment accounts hopefully cover the mismatch between COLA and actual inflation.

(2). This is the main reason I stick with the TSP, where the G-fund doesn't have market risk, and I use it to rebalance against the other stock funds.

While there may be no market risk the G fund isn't keeping up with inflation. So I am not sure how to use it right now?

 

[tfudtuckerpucker]

Very good discussion of this program on Bogleheads.

http://https://www.bogleheads.org/forum/viewtopic.php?f=10&t=353909

Your link is malformed- FIFY
https://www.bogleheads.org/forum/viewtopic.php?t=353909

Interesting discussion.

 

[mrfeh]

I, for one, am glad the Fed acted in both crises. Do folks somehow think the real economy would have been better off with austerity?

+1

I have to chuckle when Joe Six Pack criticizes their actions.

 

[pb4uski]

.... Jeremy Grantham is quoted as "they have the housing market, stock market, and the bond market all over priced at the same time". ...

As usual, he nailed it.

Not sure if it is paywalled or not but Shiller wrote and article in the NYT on Oct 1, 2021 saying the same thing.

https://www.nytimes.com/2021/10/01/business/stock-bond-real-estate-prices.html

The prices of stocks, bonds and real estate, the three major asset classes in the United States, are all extremely high. In fact, the three have never been this overpriced simultaneously in modern history.

What we are experiencing isn’t caused by any single objective factor. It may be best explained as a result of a confluence of popular narratives that have together led to higher prices. Whether these markets will continue to rise over the short run is impossible to say.

Clearly, this is a time for investors to be cautious. Beyond that, it is largely beyond our powers to predict. ...

 

[Markola]

^^^^^ Brilliant. Thanks. I agree with Schiller’s conclusion:

“Timing is important, yet it’s impossible to time the markets reliably. It would be prudent, under these circumstances, for investors to make sure their holdings are thoroughly diversified and to focus on less highly valued sectors within broad asset classes that are already highly priced.”

I’ve heard a couple of experts comment that emerging markets and small cap value stocks are relatively underpriced. I’m not changing anything, because I don’t chase sectors, but when I read articles like this, I take some comfort that we own Vanguard’s recommended % of international stocks and bonds. It seems, to me, the most promising way to balance the pendulum.

 

[Midpack]

There is that. While I am one of the lucky ones with a COLA'd pension (lucky because I certainly never gave it a thought when I applied at age 22) I am well aware that the despite the last report of 106% funding the amount is in fact finite. That said, I am only a little bit comforted by the knowledge that if I am in deep doo-doo, lots of other people will be even deeper in it.

You’re in relatively good shape for what I’ve read. I don’t want to name those that are woefully underfunded, info funding status is readily available on (almost) all the public pensions, but I used to live near Chicago in Illinois. “Fortunately” some recipients there have 2-3 pensions so they may the equivalent of one pension in retirement…

 

[youbet]

I, for one, am glad the Fed acted in both crises. Do folks somehow think the real economy would have been better off with austerity?

These are the reasons I sleep a little better with a 50/50 allocation that is diversified internationally.

I try to remember that there is a lot of space between a very aggressive stimulus policy and a policy of austerity. To me, the real question involves the level, type and duration of the stimulus' they have pursued. How close to the "right" level and type of stimulus are they providing and when and over what period of time should they back down?

We'll never be able to grade them with 100% accuracy because we can only guess at what the results of different policies would have been. And, of course, politics comes into play.

 

[kevink]

Your link is malformed- FIFY
https://www.bogleheads.org/forum/viewtopic.php?t=353909

Interesting discussion.

Thanks very much for fixing this! Unfortunately it's too late for me to go back and edit it. But yeah, really good discussion over there.

 

[Time2]

There is that. While I am one of the lucky ones with a COLA'd pension (lucky because I certainly never gave it a thought when I applied at age 22) I am well aware that the despite the last report of 106% funding the amount is in fact finite. That said, I am only a little bit comforted by the knowledge that if I am in deep doo-doo, lots of other people will be even deeper in it.

I have a friend that had a 20+ year sales career with Wang. He was let go within 4 months of receiving full benefits (medical and retirement pension controlled by Wang), along with a bunch of other employees at the same time. There with a nice pension to look forward to. He didn't get it.

 

[finnski1]

I have a friend that had a 20+ year sales career with Wang. He was let go within 4 months of receiving full benefits (medical and retirement pension controlled by Wang), along with a bunch of other employees at the same time. There with a nice pension to look forward to. He didn't get it.

Oh Yeah good ole Wang. I remember them well. Had one of their main huge buildings right down the road when I was living in Lowell Ma. They were one of the high flyers for awhile until they weren't, much like Digital Equipment Corp.

 

[SnowballCamper]

While there may be no market risk the G fund isn't keeping up with inflation. So I am not sure how to use it right now?

Yeah, it sure doesn't keep up with inflation. I use it to rebalance against C, S, and I funds. I'm 25% each of C,S,I, and G. So as C,S, or I appreciate in price I sell them and put the proceeds in G. Then if the bond market happens to be wonky (down) at the same time as stocks, I'll still have G funds to buy C,S, or I on the dip through a rebalance. Using the F fund would do almost the same thing, but with market risk. I've elected for a little more inflation risk and less market risk...My hope is that the stock gains outpace inflation in the long run. TIPS might be a better option, but you'll have to use the secondary market to sell them to get the cash to buy securities during the dip.

 

[kgtest]

I, for one, am glad the Fed acted in both crises. Do folks somehow think the real economy would have been better off with austerity?

These are the reasons I sleep a little better with a 50/50 allocation that is diversified internationally.

Sometimes doing nothing is the worst option...aikin to basically "hoping" which is one of my least favorite strategies. Glad they did something.

 

[pb4uski]

Oh Yeah good ole Wang. I remember them well. Had one of their main huge buildings right down the road when I was living in Lowell Ma. They were one of the high flyers for awhile until they weren't, much like Digital Equipment Corp.

Two great examples of high flyers that flamed out... in the late 1970s and early 1980s they both looked pretty bulletproof.

 

[Spock]

I'm mildly surprised at the lack of reaction to former members of the Fed using phrases like "economic collapse" and acknowledging the fed is trapped by Wall Street.


I'd heard ranters saying the same about the 2008 "event"... but this is straight from the people who were driving the bus at the time and it was kind of a "holely (dryer) sheet" moment for me when I watched the vid.



As far as those stating "I'm glad the fed did what they did" by kicking the can down the road... I would much rather the crash happened when I was 12 years younger and better able to react than now when I'm no longer able to get a job or generate income. It would have been a smaller event back then as the bubble is now exponentially larger and will result in a much larger mess.

It would be interesting to split responses between "fat" FIREs and retirees that have less financial wiggle room but that's a task for a different day.

 

[Markola]

^^^^^ Things were truly terrible for personal finance before the Fed was created to act in the face of repeated panics, bank runs and depressions. The institution exists to, effectively, “kick the can down the road” when times are bad. So, should they not act? One reason they threw the kitchen sink at the 2020 pandemic crash is because of the anemic growth for years after the Great Recession, after which plenty of “smart people” said they hadn’t done enough.

The Fed is an independent body, so reform by Congress (LOL!) seems rather unlikely, since they can’t agree on what day of the week it is. I’m more glad than not glad that the Fed is independent of the modern Congress.

Finally, what are the alternatives to remaining fully invested? The most workable amelioration strategies for me are LBYM and international diversification. I’d also say Bitcoin, but we have no experience with that new asset class when the S(really)HTF.

My .02, anyway, which is, in sum, “What are ya gonna do?”