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Even the Fed's Money Won't Hold the Markets Up Much Longer
The
financial world seems to think that because Greece accepted another bailout
we’ll be off to the races in the markets.
Aside from
how absolutely moronic this view is (how’d the first Greek bailout work out?
And it was what 12 months ago?), we have to consider the backdrop against which
this particular tragic-comedy is playing out.
The
consensus view from the mainstream financial media and 99% of find managers is
that liquidity and access to loose money from central banks will keep things
afloat.
However,
reality shows this not to be the case… at all. Consider for instance the impact
of the Fed’s money pumps.
For
starters, as a back of the envelope analysis, consider that in 2007 when the
credit markets first jammed up, the Fed resorted to providing emergency money
pumps of $30 billion or so.
By June
2008, the Fed had done this 14 times to the tune of $200+ billion. Then came
the $700 billion bailout in November 2008.
So by the
end of 2008, the Fed had put in nearly $1 trillion in capital to the markets.
And this did absolutely nothing to avert the market collapse.
Then came QE
1, which put another $1.25 trillion into the markets. And even after QE 1 ended the Fed continued supplying the juice to the tune of $30
billion or so per month during options expiration weeks.
Then we get
QE lite, which results in another $300 billion into the markets plus QE 2 which
adds another $600 billion. So all in all, the Fed’s supplied a minimum of $4
TRILLION into the markets since 2008 (I’m not accounting for the trillions more
in deal that have not been made public). And the S&P 500 is at roughly the
same level as before the Bear Stearns collapse:
So on the
surface of it, the Fed’s money spending appears
to have accomplished something positive: they spent $4 trillion and the markets
rallied bringing household net worth up 17% from its low in 2009.
However,
when you dig deeper into the specific results of the Fed’s actions it becomes
clear that not only is the Fed creating a giant Ponzi scheme in the financial
markets, but that we’re getting close to a breaking point.
Consider
that QE 1 provided $1.25 trillion in liquidity to the markets. From the date of
its inception until its end, the S&P 500 roughly 540 points. Put another
way, each $10 billion was worth 4.3 points on the S&P 500.
In
comparison, QE lite and QE 2 put roughly $900 billion into the market (roughly
75% of QE 1) creating a 251-point rally in the S&P 500. In this case, every
$10 billion in additional capital was worth 2.7 points on the S&P 500.
So $10
billion of Fed money today is worth just over half (62%) the market gains of
$10 billion in Fed money back in 2009. Put another way, every new injection of
$10 billion from the Fed is producing less and less results.
If we step
back and look at this plainly, we will see that reality does not in any way
match the view that the Fed’s liquidity will solve the financial world’s
problems. In fact, we see that each Fed move is having a smaller and smaller
impact on the financial markets. Extend this idea out a bit further and you
find that we will reach a point at which the Fed will no longer have any
control over the financial markets.
I believe
that we are rapidly approaching that point. Indeed, the Fed has already hit a
wall in the sense that the negative impact of its policies (inflation/ prices
soaring) far outweigh any positive impact (stocks rallying).
At some
point, and I cannot say when, the market will begin to realize that the Fed
cannot backstop the entire financial system. When this happens, THEN the REAL
Crisis will hit and it will make 2008 look like a picnic. The reason is quite
simple: the next Crisis will be a Crisis of Faith pertaining to the US Federal
Reserve.
For 80+
years, the US financial system has operated under the belief that the Federal
Reserve could handle any problem. This belief was put to the ultimate test in
2008 when the Fed faced off against the biggest Financial Crisis of the last 80
years. And the ONLY thing that kept us from the brink was the belief the Fed
could fix things.
It couldn’t.
And we’re all beginning to see that now.
So when the
next Crisis hits it will become clear the Fed CANNOT fix these issues (it never
could but most people hoped regardless). And that’s when the real collapse will
begin.
It’s coming.
The fact Bernanke has admitted publicly that he’s clueless what’s going on is a
MAJOR step towards the world realizing that he’s lost control.
If you’ve
not taken steps to prepare for the coming Crisis, you can download my FREE
report devoted to showing in painstaking detail how to protect yourself and your
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Good
Investing!
Graham
Summers
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My favorite chart is the ratio of the Dow Industrials over adjusted reserves going back to 1918. Check it out!
http://research.stlouisfed.org/fredgraph.png?g=10F
Put another way, every new injection of $10 billion from the Fed is producing less and less results.
Every addict knows this intuitively!
DaddyO
Why Ben is losing the control? Because China and Russian know exactly what Ben wants to do and they will react with counter-measurements.
Of course, millions of smart investors like ZHers take every opportunity created by Ben.
Why Ben is losing the control? Because China and Russian know exactly what Ben wants to do and they will react with counter-measurements.
Of course, millions of smart investors like ZHers take every opportunity created by Ben.
Just keep printing...I don't care...buy oil, gold and sliver (USO,GLD,SLV) and be Happy::))
That being said, inflation is crushing my grandparents who are the trusting types and still have most of their savings in...well, savings...which loses more value every day as blueberries, eggs, grapefruit, etc soar.
William Greider in his book, Secret of the Temple, said, 'Inflation is a transfer of wealth...from savers to debtors."
I agree.
Pathetical.
We'll see.
What you Don't know is to the umpteenth power of what little smidgen you do know.
And what little you also know. Fact is, no one knows whats coming next, Bernanke has denied QE3 is the plan contrary to all market crackheads who have become convinced endless printing is the plan...far as anyone knows, this is the long term top right here.
markets got legs till obamas re-election
zero chance Obumma will get re-elected, the puppet has been the biggest damp squib in history, doubt he can sell a single autobiography now
..as for levitating markets this is Mr Summers point above, similar to deflationist Rob Prechters, that printing yet more money has less and less effect. That stands to reason as inflating the money supply does by nature cause inflation and flip-side negative for Benny reduces the value of every single buck in circulation
...Benny is writing his own death warrant. Every time he prints to shore up some bankrupt politico or bwanker or buys some toxic crap or (allegedly) pumps the stock markets up he reduces the power of Benny Bucks to do the job
And as everyone knows what goes up must come down. By inflating the economy Benny is also baking in the mother of all reverses, hyper deflation
"Even the Fed's Money Won't Hold the Markets Up Much Longer"Oh contraire, I beg to differ. If i may be so bold, Yes it will. James Altucher says so.....
http://www.businessinsider.com/james-altucher-dow-20000-2011-7
DOW 20,000 with a dollar 30% lower than it is now. Whatever. BTW, what FED money? Everyones got their chickens hatched and stock profits counted, and not even any idea if theres a farm yet.
I bet you could get more of a stock market bounce by summarily and publicly executing one Fed board member a day than you could by any particular Fed intervention.
+1776. Thank you. You just made my day.
That you, Vince Flynn?
Very insightful.
As nobusiness has pointed out, it is possible that Fed can generate higher points in a thinly traded market with same amount of money printing . However, I do agree with you that Fed interference will be less effective as the index climb higher and higher.
Dumping my 401k and spending it on boats and hoes.
You're in luck. I happen to be a licensed first mate. And I happen to be available. What time do we shove off, Cap'n?
+1 boat hoes
How does he explain that since the end of QEII and the market has gone up 5%???
How come no one on ZH talk about infrastructure bank everyone so excited about?
Meeting with Hedgefunds, Chamber, government on June 14, day $TRAN turn.
What? DOW lower by 300 points since QE2. Youre just looking at table scraps.
Flight from Greece and Portugal. And a whole lotta liquidity going around since it's not being parked in Treasuries (that's being funded by pension raids).
I think you meant 1.5%. Or did you mean GDX?
So my argument all along holds that as degenerate stock gamblers fascinated by their 'rising markets' 100 P/E shiny stock baubles dont realize that theyre actually losing, in particular priced in metals to their ever more worthless dollar denominated stocks. The FED's plan is working pretty good, keep the dumb sheeple gamblers placated and seeing no reason to sell their stocks and 401K's, while they dont even see theyre holding things dropping in value while it looks like theyre going up as the FED removes value thru monetization, and theyre too bullheaded to even see it. Whatever, I hope they all lose their asses suddenly 1 morning.
Greeny for 1 needs to read this post, with his constant assertions that 'the markets are going up, doomsters'....yea, well less and less every day...running on fumes, and 747's out of gas make real lousy gliders.
Actually a 747 has a better glide ratio than a Cessna, but it is a little more difficult to land in a field.
if you bought into the market at its low of 6000+, over the past three years its fair to say you havent lost.
And if pigs had wings, they would fly.
What is with these specious "If you ..... at such-and-such time, then you ......" scenarios anyway? Yeah, tell us, just HOW MANY people were sitting ALL in cash in March of 2009, then went ALL IN on stocks at the exact market low? You can play such hypothetical games and run such scenarios all you want, but it doesn't change the fact that very, VERY few people could have or did take advantage of that optimal opportunity.
This is analogous to all those anti-gold shills who love to trot out the canard of "if you bought gold at its (then) all-time high in early 1980, you lost XXX dollars in the intervening YYY years ..... blah blah blah." Of course, only a TINY fraction of gold owners in 1980 bought gold at its all-time high, so the statement is utterly irrelevant, except to those unfortunate few. It would be much more pertinent to address the situation of the MAJORITY of asset holders, not a tiny select fraction who hypothetically bought or sold at some ideal, or worst possible, moment.
In this case, every $10 billion in additional capital was worth 2.7 points on the S&P 500.
That's better than the investment:jobs ratio...but still going to decline asymptotically.
"Extend this idea out a bit further and you find that we will reach a point at which the Fed will no longer have any control over the financial markets."
The Fed exists to enrich its stakeholders. Get rid of it since it will soon lose control anyway.