The federal reserve is charged with managing the economy by manipulating interest rates and the money supply. This task is monumentally tricky as the Fed must use data concerning what the economy has done in the past. It’s like driving a car forward by looking in the rearview mirror.
That challenge is made even more difficult because of flaws in the data relies on arising from the way it is collected and presented. This flaw is particularly impactful concerning measures of housing price inflation. Actual transaction prices show 20%, while the CPI reflects 7.5% over the past 12 months, focusing on “owners equivalent rent,” the rent one might collect if they rented their house instead of owning it. We think this, among other factors, caused the Fed to be too loose for too long during this credit cycle. Too loose for too long also impacted stock prices. The Buffett Equity Value indicator shows stock prices relative to GDP hit an all-time high a few months ago and is headed down.
