Juggling Dynamite

For the past 15 years, the US Federal Reserve has maintained a “see no evil” policy on asset bubbles–they said they couldn’t see them building, so not possible to avoid them. But this time around, 5 years after the credit bubble burst so horribly, Fed efforts to mop up the mess have now left its own financial stability in jeopardy. This is not a Fed who can view markets dispassionately from the side lines, this is a Fed who has tripled its own balance sheet to absorb trillions in over-priced bonds over the past 3 years. This time the Fed itself is at risk of “significant capital losses when these holdings are unwound” (as acknowledged in the Fed minutes yesterday). Now at last the Fed has a very personal reason to predict and manage the risk of asset bubbles. Perhaps even where this requires withdrawing liquidity from a slumping economy.

WSJ’s Global Economics Editor David Wessel and Chief Economics Correspondent Jon Hilsenrath (aka Bernanke’s mouth) discuss the Federal Reserve’s newest concern: The danger that its easy money policies may fuel another financial crisis.Here is a direct link.

I saw Zero Dark Thirty this week. It is very entertaining, but also reminds of the incredible financial cost the US has unnecessarily born in its stubborn dependence on foreign oil and hostile regimes. Time to wise up.

“Manufacturing in the U.S. could take off right now on the back of “the cheapest energy in the world,” BP Capital founder T. Boone Pickens told CNBC on Thursday.

Prices from American supplies are “20 percent cheaper on oil; 75 percent cheaper on natural gas; and 50 percent cheaper on gasoline,” he said in a “Squawk Box” interview, adding that companies could pay their factory workers higher wages and still make more money than they would if they outsourced overseas because of lower energy input costs.”

Here is a direct link.

Top line gains for the broad Canadian stock market over the past year have been driven by the financial sector as low rates have continued to drive yield-desperate capital into over-valued bank shares. Unfortunately as reflected in the chart update below, the real economy and the sectors that drive it like energy, materials, and Canadian housing are all in the midst of an ongoing downturn. Canadian banks have never been impervious to previous economic downturns, and with slowing global demand and debt-strapped Canadian consumers, financials seem particularly vulnerable this time.

Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.