The Punch Bowl, After the Half

(This is part 2 of a 2-part article.  See part 1 “The Punch Bowl, Before the Half”)

The stock market for the past 5 years has been all about the Federal Reserve, aka the Fed.  Investment companies, big-time traders, and investment banks know the Fed is the key to the direction of the stock market, bond market, currency trading, and futures.  Follow the Fed.  Forget with the real job numbers.  Forget the real inflation rate.  Forget the real GDP numbers and economic health of the nation.  All that matters to Wall Street is knowing if and when the Fed is going to take away the punch bowl—low interest rates.  The Fed has set interest rates at historically low rates.  Unprecedented lows.  Abnormally low.  Dangerously low.

The Fed sets short-term interest rates.  They also control long-term interest rates today by manipulation.  Simply put, the Fed controls interest rates.  Knowing when the Fed is changing interest rates, knowing which way interest rates are going(up or down), and for how long is the key to fortunes in the markets.  It’s the key to knowing if the stock market will continue to rise or not.  Politicians, the Fed, and Wall Street want the market to keep rising regardless of reality.  The Fed’s mandate since 2009, I believe, is to prop up the stock market.

I’m all for a rising stock market, so long as it is an honest reflection of a healthy economy.  I am NOT for a rising stock market if it is a sham founded on a lie, purchased in secrecy, at the expense of every American who saves and uses U.S. dollars. 

The printing of money out of thin air creates inflation.  Inflation reduces the amount of stuff you can buy with your dollars.  Those dollars you had in savings?  Inflation drops their value.  You didn’t do a darn thing, and yet now you can’t buy as much stuff with your savings.  Contrary to popular belief, inflation is NOT normal, it is not good for you, and it is not good for the economy.  Inflation is STEALING.  Inflation is the Fed and U.S. government stealing your savings without your permission.  Burn that fact into the mind of everyone you know:  Inflation is not normal; it is theft.

The Fed’s 3 most powerful tools are setting interests, their limitless balance sheet, and secrecy.  By controlling interest rates, the Fed controls the supply of dollars circulating in the U.S. economy.  When the Fed wants to cool off an over-heated growing economy, the Fed increases interest rates.  When the economy is slow, depressed, in a recession, the Fed decreases interest rates to encourage folks to borrow and spend more, thereby jump starting the economy into growing again.  With a limitless balance sheet, the Fed can add an unlimited supply of debt to their books.  Whenever the Fed wants to take your bad loans off your books, the Fed print gobs of money out of thin air and pays you for your bad-apple debts.  Your bad apple debts go onto the Fed’s books. The Fed’s balance book is full of bad apples—3 trillion dollars worth of bad apples last I heard.  But who really knows?  The Fed’s third most powerful tool is secrecy.

Everyone is watching the Fed.  Next time you see a jobs report announced, do not react to the report’s good news or bad news;  instead, calculate how the Fed is going to react to the jobs report.  That will tell you which way this artificially inflated stock market is going.

Remember this past fall when the stock market was turbulent because of the budget crisis, government shut down, and debt ceiling?  The stock market was not reacting to the budget crisis, government shut down, or the debt ceiling.  The stock market was trying to anticipate how the Fed was going to react to the crisis, shut down, and debt ceiling.  In addition, Federal Reserve chairman Bernanke was coming to the end of his term.  There was speculation as to who the new chairperson would be.  A big deal.  Would he or she be like Bernanke, keeping the punch bowl full?  The “unknown” factor was causing turbulence in the stock market—not all that other stuff coming out of Washington D.C.   The new Fed chairperson, Janet Yellen, was nominated in October and confirmed by the U.S. Senate this month.  Follow the Fed!

OK, so we know the stock market is dependent on the Fed keeping interest rates at unprecedented lows.  The Fed has set the short-term interest rates low, and has manipulated long-term rates down by buying-up long-term government bonds.  Any deviation from that course is of grave concern to Wall Street and consequently the stock market.  Any hint from Janet Yellen indicating she wants to raise interest rates or taper back on current purchases of long-term bonds will crash this stock market.  The market will crash because the only thing holding it up is the expectation the Fed will not take away the punch bowl of low interest rates.

No one on Wall Street believes the economy is healthy and thriving on its own.  No one on Wall Street believes the stock market is still an honest reflection of the U.S. economy.  The stock market is up.  Way up.  The Fed has achieved that much, I have to admit.  But I’m not too surprised;  there were hopeful periods of rising stock market numbers during the Great Depression also.  But, I don’t recall any stories of rising hopes coming out of Main Street during the Great Depression.

Yes, we have inflation today, but not the kind of crazy and devastating inflation we will soon see.  All those inflationary dollars are locked-up in the stock market and bank vaults right now.  And the Fed is watching, scared to death when the genie of inflation escapes the bottle.

I’m not suggesting or recommending anyone “time” the stock market ahead of moves by the Fed.  That’s a fool’s game.  When the market crashes start to happen again, all the big players on Wall Street will be the first ones out the exit doors.  The purpose of this article is to shed some light on how and why the stock market is soaring while Main Street is plummeting.

If you are looking for a gauge or barometer of Wall Street’s confidence in the Fed’s ability to continue propping-up this stock market watch the yield on the U.S. Treasury 10-year Note. Right now, the yield is just under 3%.  Things will get dicey when the yield rises above 3%.  The yield is not a predictor of the stock market, as no single indicator can be.  But, the 10-year yield is a silent alarm.  No one knows the breaking point on the yield.  It might be 3.5%.  It might be 6%.  At some point, the yield will indicate Wall Street has lost confidence in the Fed’s ability to contain inflation and maintain the lie that is propping up this stock market.

Today, the stock market is all about the Fed.

I don’t worry about “if and when” the Fed will take away the punch bowl from Wall Street.  I worry about “when” history will take away the punch bowl from the Fed. 


(This is part 2 of a 2-part article.  See part 1 “The Punch Bowl, Before the Half”)

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