Tuesday, July 15, 2014

Santelli's Epic Rant on the Fed, Easy Money & Markets on CNBC

CNBC, July 14, 2014

CNBC reporter and commentar Rick Santelli in Chicago says that the Fed needs to get back to a less volatile form of central banking. If not, there will be a lot of unintended consequences. When Steve Liesman asks should policy be run to please traders in Chicago, Santelli says that the traders didn't contribute a penny to the crisis and the traders erupted in a roar of approval. Santelli argues that the economy and the markets need a better feedback unaffected by the Fed's manipulation.

Rough Transcript:

The following transcript has not been checked for accuracy.
i think we need to get back to a more steak and potatoes mundane, less volatile form of central banking. we are not in a crisis. and janet yellen and ben bernanke still treating the economy as though it's in crisis. equity traders don't seem to be too bugged because they know in the end, what's in the new yorker that i've read, easy money will outlive any types of tailwinds -- excuse me, headwinds to the economy. and i think that's what stock traders are looking at. you're suggesting that the longer the fed waits to raise rates, the harder time the market is going to be able to digest that. and also the dangers of inflation coming into the picture down the road. is that what you're putting forth? reporter: i think you've just listed two unintended consequences. i think that the litany of unintended consequences is much larger. the list is much longer. and the ultimate questions about how it turns out are much more vague. in the end, this isn't what the central bank of the united states was created for 100 years ago. it was supposed to be a nudger. now it's embedded in a political, social type of financial engineering, not the least of which you would never go to an accountant on a personal level that treated your money in this kind of group feel-good setting. steve, the drumbeat appears to be getting louder. at least people are talking about it more than they have in the past several months as to whether the fed is truly gotten itself behind the curve and now how it rights the ship. drumbeats can be loud as you want them to be, but whether or not there's any actual action, i don't see it. i've been very careful to watch markets and see how there's some expression over this concern over inflation. it's very hard to find. it's just not out there. you asked the question is the federal reserve behind the curve? it's well to remember that it is the federal reserve's policy to be behind the curve. janet yellen said it in the new yorker article today. and the statement goes as follows, scott. that interest rates will remain lower than normal when markets return to normal. so the question about whether or not that engenders higher inflation or not, what we do know if there's been a certain wing of economic -- the economic profession that's been talking about the concern about inflation for many, many years and it has not materialized. and that remains their driver for what they think the federal reserve should do that they should end their qe policy earlier. some of the fed's own members have suggested that. closser has brought that up as well. hey, steve, you're talking about feedback loops, okay? come on, steve, be objective on this one. you don't think the feedback loops of a free market have been sufficiently pushed back, that it's very hard -- you sea, well, i don't see any signs of it. well, why would you? we're in a managed setting. we're in a managed setting. if a baseball league puts in their crummiest players, what's the feedback loop for the talent? rick, i think there are many ways that the market can express its concern over inflation. you can sell equities. the market has the ability to set an outlying fed funds futures rate. reporter: why? because we're giving expect xyz super low rates to artificially make pe ratios look handsome when they're still a pig. well, first of all, it strikes me that the pe ratios, as are traders here on the right have told us quite a bit, they're not particularly out of line. there is some bubblelike stocks that are out there, but overall -- reporter: because of the stock buybacks. what's that? reporter: that's the driving force. right. so however you get there -- reporter: however you get there. if you want me to trade on earnings and not per share, then, you know, i've got a bridge to sell you. reporter: the stock market had a hissy fit. we've deprived the market of hissy fits. but now they're going in a measured way. reporter: that's it. it's going. just like they said, we're just going to play the music. do you want to hear a social policy from the head of the biggest central bank who controls $4.5 trillion of america's money? i want the fed to do what it's supposed to do, which is to bring about an economy with low unemployment and low inflation. reporter: they're bankers! they're not psychologists! rick, it's not clinical. you know what i want to do? rick sort of alluded to it. why wouldn't you buy stocks in this environment, mike murphy? that's clearly what people have been doing. you guys don't seem to be overly concerned about this question we enter at the top of the show, though it is getting louder in the market. it is getting louder, but i think right now equities are the main game in town. i won't say the only game, but right now you wouldn't go out to rick's point a equities, but my take on the fed is they're trying to keep the market inflated because think back to where we were, rick, in 2008. this is still a reflection of where we were. the financial crisis. so i think they're going to err on the side of caution which i'm fine with. and that's given us this nice long rally in the equities market. and i think it continues. reporter: do you think there was easy money in front of the crisis? do you think that was one of the contributing factors? yes or no? in hindsight, it was, yes. reporter: okay. well, why don't we get some hindsight early now? hey, rick, this is one of the biggest non sequitur discussions i think i've ever heard because if you think about 79 million baby boomers who are entering retirement and you understand the fact that a quarter of them are going to make it to 93 years old, if we think that there is inflation coming down the pike, why would they want to buy bonds? they have three decades, they're guaranteed to lose money at face value in a ten-year treasury. they should be adding to stocks, not adding to bonds. reporter: demographics don't have money. they don't have jobs. they're living in their parents' basement. and at less than half of americans' own stock portfolios, so who exactly are we helping here? we have an unemployment rate that is now growing commensurate with the late '90s. reporter: you think they're going to be better educated to get a job? it's making it worse and isn't addressing the problem. how does monetary policy again address the problem of millennials that don't have skills for the job marketplace? explain to me. should they work for the fed? reporter: stand up and do. congress, we've done the most we can do. we've nudged the market. now the feedback loops happen and there's a big ruckus in november. problem solved. to congress what they should do? if i concede every point rick makes, he still cannot explain to me how higher interest rates brings about better economic outcomes. reporter: because if i'm a bank, why would i lend to some person in a subrisk/reward rate? -- better economic outcome. what is that? presumably higher interest rates would follow. if the issue is capital investment, what you don't want to do is raise the hurdle rate. you just complained about the idea of ceos -- reporter: if won't come out if it can get a decent return. it has little to do with the return of money, has more to do with the other side. reporter: personal feelings about social banking policy do? the question you want to ask yourself, rick, is whether or not -- reporter: that's the question i'm asking. that's the one i want answered! precisely, rick. that is what the fed, under bernanke and almost under every fed chair. what should it do, rick? reporter: created to be a feel-good institution. what's the policy for you and the traders down there in chicago, is that the correct policy? reporter: the traders never contributed one penny to the credit crisis! not one penny! not one penny! i'm not sure how that has anything to do with what i just said, and every applauded you. i would say from an investing point of view, just to bring it back to what we actually do, i think it's interesting that the late cycle sectors are doing well. and i think that's because people do expect inflation to come from all of this easy policy that we have seen over the last several years, that it's going to eventually work and that i think we are seeing some interesting signs now that we're getting better in jobs certainly. but if we look at manufacturing, if we look at auto sales, there are pockets of the economy that are getting better. and if this policy stays somewhat on the easy track, which i think it will for a little while longer, we'll continue to see the economy improve and again pain that leads to some inflation, but then you want to rotate into energy and materials. it's improving better than the fed is giving it credit for. but wage inflation is nowhere to be found. it's 2% on an annualized basis. there's a big and important debate as to how much slack is in the economy. and there are people on both sides who say that there's less slack than the federal reserve believes. it's well to remember -- why do we debate it? why don't we let the market tell us? okay? you tweak grades, you get bad feedback, you tweak them the other way. what is wrong with some mental flexibility? rick, i'm sorry, but the general consensus of the economic community -- reporter: i don't care about general consensus. i don't care that europe offers entitlement. we're america! we don't believe in consensus. they also reject talking over people, but that's another story. the general idea, rick, is if you put this on autopilot -- reporter: i don't want a general idea. i want the fed to be a banker. a banker. tweak rates a little up and down. let's bring many -- reporter: congress over. congress shouldn't allow them to keep going with crisis management. we got your point. let's bring in the head of foreign exchange distribution. paul, you've heard the argument from both sides. i think you would agree that certainly more people seem to be entertaining this question today and its relationship to where the market will go from here. what's your take? is the fed behind the curve? are they in danger of getting behind if they're not already there? who cares? i mean, a year ago the fed tried to message something very different, and look what happened to that summer market. there's no way they're making that mistake again. and now we've got yellen there who worked with bernanke. they put something together five years ago. and rick can argue that the fed shouldn't be doing these kinds of things, but if they hadn't, where would we be now five years on? reporter: counterfactual. we'd be three years into a recovery. that's what i say. disprove it! rick, are you trying to get another round of applause here? i don't need a round of applause! i have history on my side here! the way i look at it, rick, is this. let the job get done. tapering is almost done. then let the market get six months. reporter: it's not janet yellen's job, and somebody needs to say that! it is about patience. and patience is going to get this job done. reporter: patience. it's been 5 1/2 years. japan's got patience. whoopty doo. the jury's still out as to whether the fed is going to help -- reporter: no, no, there is no jury. who's the jury? who are you talking about specifically? i'm the judge. i'm talking to the jury that's here. reporter: professors? you let valet park your car? rick, you already decided this wasn't going to work five years ago. is some of your anger -- reporter: i was right! i was right! end of conversation. rick, it's impossible -- rick, it's impossible for you to have been more wrong, rick. your call for inflation, the destruction of the dollar, the failure of the u.s. economy to rebound. reporter: i'll tell you what. i wasn't wrong on inflation. i didn't think they could have policies so bad that we would get no velocity after 5 1/2 years. i thought the world would say huh-uh. it's taken too long. new strategy. there is no piece of advice that you've given that's worked. reporter: they have a better strategy for the cubs. there is no way to go. there's not a single one. reporter: oh, yes, there is. not a single one, rick. not a single one. the higher interest rates never came. the inability of the u.s. to sell bonds never happened. the dollar never crashed, rick. there isn't a single one that's worked for you. paul richards, i'll give you the last word. the last word is patience. you let the fed continue to do their job and all is going to be fine. be long equities going into tomorrow, scott.

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