Fool.com: Machiavelli Rides Again [Fribble] June 13, 2000

Fribble Machiavelli Rides Again

By BlacknBlue (doest@hotmail.com)
June 13, 2000

A recent SmartMoney.com poll -- "Is the Fed Killing the Bull?" -- indicated that 82% of those responding to the poll believe that Alan Greenspan has gone much too far with his rate hikes. Since I'm not a fan of Mr. Greenspan, I was happy to see someone giving him some negative publicity.

In my view, it's the highly questionable activities of the Federal Open Market Committee (FOMC) that have cost retired small investors like myself around 40% of their portfolio values since March 3. As a matter of fact, the Federal Reserve announcement of the rate hike made in March contained a paragraph entitled "Regulatory Flexibility Act Certification," in which it stated, "the change in the basic discount rate will not have a significant adverse economic impact on a substantial number of small entities." Then how do we explain the 40% decline in portfolio value?

The enormous economic impact that the Fed's moves have had on the stock market over the last two months is, to my mind, the most important story about investments and stocks. The foul wind from the Fed blows everything else away, and good earnings reports mean absolutely nothing.

The only thing that keeps our government from becoming a tyranny is checks and balances, but the Fed is apparently immune from any censure. This was a very unfortunate oversight on the part of Congress when it created the Federal Reserve system in 1913.

In recent years, much activity in Congress has been directed at something that
is called deregulation. Fortunately, Congress has recognized that laissez-faire economics is, after all, a pretty good idea! I submit that the actions of the Federal Reserve Board are the antithesis of this.

For the last two years, there has been a small correction about mid-April, and then a much more larger one in July, which has lasted for several months until the market wakes back up in November for the so-called Santa-Claus rally. This year, the correction started a couple of months early, and it has been a massive one. My hypothesis is that it was initiated by the Fed early because it is a presidential election year. The post-correction rally could then begin well before the election in November.

I do not think that there are any accidents when it comes to monetary policy. I also think that there's a cause-and-effect relationship for everything that happens relative to government policies -- there is no shortage of scheming by the politicians who have the power to make things happen.

Machiavelli is alive and well, flourishing in the nation's capital!