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Did the Federal Reserve Break the Stock Market? 

The Federal Reserve’s mother of all quantitative easing may have broken the market. 

Walk away from the bulls in a china shop. Excuse yourself from the two bears at a dinner party talking about stocks. The stock market is broken, and you can thank the Federal Reserve for turning the arena into a Three Faces Eve monstrosity. The U.S. central bank has intervened in the equities ecosystem since its inception, but its unprecedented aggression over the last three months has never been seen before. The result has been chaos, confusion, and catastrophe, unrivaled by any previous Fed chairman. Everything about today’s performance – both the rally and the fall – defies logic and sensibility. But you cannot expect rationale and reason from a stock exchange that is high on soma, à la Brave New World. The Eccles Building has forever distorted Wall Street.

A Timeline

It was an exciting week on the New York Stock Exchange. To try to emulate Liberty Nation’s Kelli Ballard and her excellent timeline pieces on the Coronavirus pandemic, here is a brief chronology of what went down in the stock market.

  • June 8: The market was all abuzz about bankrupt stocks soaring.
  • June 9: It was a relatively quiet day on Wall Street.
  • June 10: The Nasdaq Composite Index settled above 10,000 for the first time.
  • June 11: The Dow Jones Industrial Average crashed 1,800 points and had its worst day since March.
  • June 12: The leading indexes reclaimed some of their losses from the previous day.

Even more entertaining were the business news headlines, attempting to rationalize what happened during each session. Analysts attributed the rise in insolvent retailers’ shares to Robinhood traders. Reporters cited confidence over reopening economies for the tech-heavy Nasdaq soaring to an all-time high. When the market cratered, it was concern over a second Coronavirus wave. Why did the Dow Jones and S&P 500 soar the next day? Investors took advantage of the dip!

Let’s be honest: Nobody knows what the heck is going on in this kind of financial market. When a billionaire hedge fund investor is losing out to someone who only recently opened a web brokerage account, you know something is brewing on The Street.

The Fed v. the World

One group of armchair investors is trying to pump up stocks only to dump them within a couple of sessions. The institutional traders are using Fed-supplied liquidity to build positions in some of the most valued companies in the world. Retirees are only praying they do not lose their nest egg. Everyone else is just scratching their head at the chaos unfolding in the financial capital of the world. This is what happens when the Fed’s QEternity corrupts a stock market, and all common sense and conventional wisdom are tossed out the window. Sure, the training wheels are not coming off anytime soon, but the central bank is sacrificing the economy for the sake of blowing a bubble to keep the mirage going.

Fed Chair Jerome Powell remarked that the fundamentals of the U.S. economy remain solid and that he has yet to alter his long-term projections about the Land of the Free. Has he looked around lately? U.S. debt topped $55 trillion, stock margin accounts are soaring again, many government programs are unfunded, consumers are tapped out, and businesses have been forced to shut down due to the nursing-home epidemic. The only way to ever reverse a market rout is to feed the beast with relief and stimulus, bankrupting both Uncle Sam and the Eccles Building even further.

What is worse is that the Fed never learns from the past, choosing to replace old bubbles with new ones. After the dot-com crash, the central bank adopted Paul Krugman’s advice to substitute it with a housing push. Everyone knows the ending to that tale. Once that was over, everything became a bubble, from vintage automobiles to bonds to real estate (again). If the Fed tightened a fraction of its balance sheet or the money supply, a tsunami of red ink would make landfall and swallow equity valuations and brokerage accounts.

It is said that the U.S. no longer resides in a free-market system. This is partially correct because the Wall Street bros at Jerome Powell and Associates have socialized losses and privatized the profits. Any time there is panic in the streets, the printing press is cranked up, and the market floods with cheap money. It is comparable to a spoiled teenager who is never taught a lesson but is instead routinely bailed out for his terrible mistakes by his well-intentioned parents.

During Powell’s post-FOMC press conference, he was asked why the Fed has refrained from shouting, “damn the torpedoes, full speed ahead!” Uh, what? He dismissed the question by saying that the Fed is already doing a lot, and Powell was 100% correct. The only thing left is for the Fed adopting subzero interest rates and directly buying stocks, as did the Bank of Japan and the Swiss National Bank. But throwing everything but the kitchen sink is what fuels the financial crises of yesterday and tomorrow. The basic economic principles of unintended consequences, moral hazards, and TANSTAAFL are ubiquitous in this market, and the Fed is complicit in stoking their presence.

Money Printer Go Brrr

According to Powell, the Fed will be on cruise control until at least 2022, waiting for the COVID-19 pandemic to be at a safe distance in the rearview mirror. He conceded that the central bank would be ready to kick it up a gear should the economy need an additional push. If you are not one of the 55% who owns stocks and if you are a boring consumer who saves his or her money, be prepared to be punished by the inflationary, low-rate blitzkrieg. You might have no other alternative but to hop on the bandwagon, scratch the monkey on your back, and buy all the stocks. If the world’s most powerful organization insures your bets, then why not? Money printer go brrr, indeed!


Read more from Andrew Moran.

Read More From Andrew Moran

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