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Is The Stock Market Now "Too Big to Fail"?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Who knows what will trigger Fed intervention; that information is asymmetric, i.e. only known to Fed insiders.
Correspondent Bart D. recently speculated that the U.S. stock market was now "too big to fail," that is, that it was too integral to the global financial system and economy to be allowed to fail, i.e. decline 40+% as in previous bubble bursts.
The U.S. stock market is integral to the global financial system in two ways. Now that investment banks, pension funds, insurers and multitudes of 401K retirement plans are dependent on current equity valuations, a crash would impair virtually the entire spectrum of finance from hedge funds to banks to insurers to pension plans.
A decimation of these sectors would impact the U.S. economy and thus the global economy very negatively.
By turning the health of the economy into a reflection of the stock market, the Status Quo has made the stock market into the one bellwether that matters. In effect, the stock market is now integral to the economy as a measure of sentiment and evidence that all is well with the economy as a whole.
The stock market is now the signal everyone follows: if stocks are rising, we're told that means the economy is healthy. Conversely, if stocks decline sharply, the implication is the economy is weak.
In other words, it's not just valuations that make stocks integral to the economy and Status Quo--the market's signaling is now the key to sentiment. In economist Michael Spence's work, the information available to participants is asymmetric: roughly speaking, those on the "inside" have better information than those on the "outside."
The stock market addresses this asymmetry by signaling what's really going on via price: if the market sells off, that tells even those with little other information that all is not well in the economy.
A rising market sends the opposite signal: everything's going well. If the participant isn't experiencing good times himself, he will still defer to this signal, reckoning that his own financial stagnation is an anomaly rather than the norm.
This explains why a rising stock market is now essential to the Status Quo: if the market reverses, everyone who sees mostly stagnation in their corner of the economy will realize that is the norm, not a local aberration.
If the stock market is now too big to fail, the Federal Reserve will have to prop it up whatever the cost. Ultimately, this may require direct purchases of stocks--an action that other central banks are already pursuing.
This shouldn't surprise us. After all, the Fed directly bought $1.5 trillion in mortgages (mortgage backed securities) to prop up the housing market, and a few trillion dollars in Treasury bonds to push interest rates down.
Just as a speculative guess, perhaps the line in the sand that will trigger Fed intervention is an extension of previous tops in the S&P 500: a line that is support that the Fed cannot let become resistance.
Just as a parlor game, let's note that this line around 1,620 is about 100 points below the 200-week moving average at 1,711, which is about 200 points below the current level of 1,914.
Who knows what will trigger Fed intervention; that information is asymmetric, i.e. only known to Fed insiders. Perhaps a break below 1,711 will cause the Fed to ready its financial blitzkrieg.
A drop to 1,620 or so would represent a 23+% decline from all-time highs--a decent correction by historical standards, but one that--if reversed in short order--would not necessarily trigger a financial meltdown.
That cannot be said of a drop that erased 50+% of the SPX's current value. If the market is indeed now too big to fail, the Fed will be forced to take unprecedented action if the decline hurtles past correction to carnage and full-blown meltdown.
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If the stock market is too big to fail, is it fair to still call it a "market?"
Who's going to buy this shit?
And with what?
Gotta take either more of it.....or less of it......I'm not really sure which one - Jackson Browne, Cocaine
Everything is too big to fail, until it fails under its own weight.
Everyone has a plan....until you get punched in the face - Mike Tyson
Wait, what is this "NOW" TBTF stuff? I'd been assuming everything finance related is TBTF since '08!
In effect, the stock market is now integral to the economy as a measure of sentiment and evidence that all is well with the economy as a (whole) hole, a big black one.
There, fixed.
Before China started selling USTs, the Fed could not have pulled QE4 off. If China and other EMs start/continue to sell their UST holdings, then the Fed might be able to get away with a final QE, but it won't have the desired effect unless the primary dealers are the ones snapping up the foreign USTs, and they have to snap up enough to make QE viable. Otherwise shadow banking gets fucked by QE4.
China is not overly concerned with our stock market and they are setting the agenda. The FED will be good for the occasional phoney rally all the way down.
Someone will have to convince China to care. That might take a while. Until then the patient bleeds out.
"Someone will have to convince China to care" ???
what exactly do you want China to do? manage your stock market?
I don't want anything.
But those who care about the US stock market will want to get China to stop doing things that hurt the US stock market.
The FED and the US cannot override China's actions for long.
Mutual exclusivity on a number of fronts, from economic structure to basic culture. There is no way anyone should expect China to care about anyone but China. If they do anything that "helps" the US it is purely in serving their own interests.
By leaps and bounds.......Bitchez
The FED will buy it; unlimited ether dollars, Ctrl+P right into the binary database.
$1.00 Dollar becomes $1 Trillion in the blink of an eye; DOW 20,000.
And yes, their madness knows no bounds.
The same people who are shoveling the interest rate hike story, that's who. You MOOK...
;-)
If the stock market wants to crash, no one can stop it, not even the Fed + the usual group of crony countries. They will all go down with it if they try.
Technically, the stock markets can go to infinity while the dollar crashes to zero.
With the FED's success in supressing PMs over the last 4 years without a popular revolt somewhere in the world, I hold no hope of their control being broken in any market until some major catastrophe occurs...
OR China chooses to stop playing the game.
The gov't will fight hard to keep the status quo but due the fact the markets are all connected now, nobody has the choice not to play anymore.........issue will just be who's bonds go to zero first.
"With the FED's success in supressing PMs over the last 4 years without a popular revolt somewhere in the world..."
Gold went parabolic 4 years ago. The math on parabolics is that 100% fail.
This was all by design and talked about years ago. This, despite the fact that not all Americans are invested in the market.
It's about control - the middle class chasing the brass ring of "retirement" and the FSA being placated sloths. Nice 1-2 punch.
Fuckers.
the bigger they are,the harder they fall...EVERYTIME
Nope!
No... I'm pretty sure it isn't too "Big" at all!
Especially as long as there is a Rule 48!!!
We'll find out in a minute. And we're off!
Gonna fade this open on strength
Hey guys! Anybody want to go in on a hedge fund where we recruit college kids, pump their egos about getting rich day trading, and use software that sells when they buy and buys when they sell? I figure since almost all traders blow up this is foolproof! If anyone is actually a good trader we'll let them go for not conforming to the "culture".
Looking for a name for the chop shop, any suggestions?
Fleece's
Goldman Sachs is already taken
The market is deemed critical to national security, they aren't going to let it tank without throwing everything they have it first.
This just highlights the lunacy of the entire experiment. The Fed decided to reflate all asset prices to create a wealth effect which would in theory make the real economy stronger. Given that they have missed their GDP forecasts for growth each and every year since 2009, it clearly didn't work, but they won't admit it. They were hoping the stronger economy would then validate higher asset prices in some type of fairytale fashion.
Now, they are screwed completely because they have created a huge disconnect between asset prices and the real economy which now poses a danger to the real economy if asset prices decline by any significant measure. Carry trades implode, corporate earnings take a hit as the cost of funds rises, pension funding costs rise and the economy slows, etc, etc.
But, this is what happens when you follow the Krugman/Summers/Bernanke/Greenspan school of creating the next bubble to fix the economy from the last bubble.
What do you mean "If asset prices decline"??? There is no IF.
It's a choice between letting the stock market fail i.e. crash, or support it with freshly minted fiat -
which will work for a while until the problems get so big the fiat currency fails.
YES PERIOD
Never trust someone that says period....especially if he's the President of the United States.
1 or 2 quadrillion $ of ultimately worthless derivatives says you are wrong. There's no way around that other than war, internal and/or external. Some pipers will be paid, most will not.
except if we finally ban all the new derivatives. and there, China might start by banning stock market shorts. and wouldn't that be hilarious
you're just guessing the level set by the fed
If you're not inside, you're outside. [/Gordon Gekko]
So don't worry! There are so many political and economic reasons that the market can't go down, so obviously it won't. Astute traders should welcome the increased volatility as an opportunity, having confidence that the economic fundamentals are strong and the fed had their back.
absolutely agree. the kenysians have forced everyone into the pool. exactly why all these brokerages are finally waking up to the fact of what this website (ZH) as well as its posters have been saying/believe from the get; that is NOT emergency measure, rather its new policy. market has always pulled back following a QE program; now that this last one has "ended" (pause before the refresh) we've gone from 215 on the SPY to 194. pension funds cannot sustain this with no viable alternative. with lackluster growth in the economy, dividends will be slashed overtime. ie. this new economy is predicated on eating itself. that is what debt eventually leads to. sugar high feels great at the time but the hangover is a bitch. longer the high, worse the recovery.
"By turning the health of the economy into a reflection of the stock market, the Status Quo has made the stock market into the one bellwether that matters. In effect, the stock market is now integral to the economy as a measure of sentiment and evidence that all is well with the economy as a whole."
No it isn't. A new record 93.8 million people are not working. The true unmemployment rate is higher than the phoney politically motivated official number.
Everyone knows there is something not right about the economy, with the FED rate at virtually ZERO.
its integral to the world financial system as a fucking cancer or parasite this consistent interferencewhen its a mere one percent down or a few pips off in any of the corrupted markets Wall Street runs is destroying global stockmarkets,commodities,curencies and ripping economies apart.
"if stocks are rising, we're told that means the economy is healthy. Conversely, if stocks decline sharply, the implication is the economy is weak"
first half is true but not the second - when we have sharp declines we're told "economic fundamentals are strong so drop is irrational"
The stock market will never really be "too big to fail".
Because in times of bear markets - people are dominated by FEAR. Fear is an incredible motivator. People will do anything to get their money out and try to preserve their life savings - if they think they can lose everything. The problem is - the vast majority of people reach this conclusion far too late in the game.
Stock markets can always melt down. Look at China for a wonderful example of INVESTOR FEAR in action.
Markets fail all the time.
Even when govts try and save them.
Especially when govts try and save them.
In-fact the more govt tries to save something, usually the more it self-destructs.
This is what happens Larry....
So it is DIFFERENT this time...
Actually, a very simple answer: A resounding YES!!!!
( don't overthink it )
Stock market is being bought by the private bankers that own the FED. They are buying it with fresh fiat and charging the citizens of various nations for their purchases of the World's corporations. They are like pedophiles. They won't stop until they are locked up.
What do you call it when the governent owns the means of production?
Sounds like Schumpeterian 'creative destruction' has been destroyed
You all realize that that "simple 300 point drop" puts us SIDEWAYS for the last 15 years.
-In effect we will just have wasted 15 years of our economic future
Has not the stock market been proxy for positive public sentiment about the economy, and by extension, the lens through which the Fed takes $$$action, since 2008...?
This is news?
This has been the case for at least 10 years
EVERY prez, particularly Bush and Obuma, touts a higher market as evidence of economic prosperity
And they do all they can to keep it afloat
It's a propaganda tool
Ask the Chinese. At least they admit it
Long way down ...
http://www.showrealhist.com/
You can still lose going all in! Ask any former super power
Well, through increasing domestic value adding productivity and foreign labor arbitrage the amount of value adding jobs in this country has steadily declined.
Because we live in a money-slave state, a form of money accumulation is required for people to eat and have shelter. What are the choices?
1. Create value adding work for people to get money
2. Create non-value adding work for people to get money
3. Create money out of thin air, via banks or government and give it to people
4. Create other money creation mechanisms, such as equity appreciation
5. Decrease the need for money
The central planners of the money-slave state have either failed to create work or never intended to in the first place.
Money is being created out of thin air and given to non-workers.
Other money creation mechanisms have proven to only benefit those who already have access to excess money.
The only real choice left, if they plan to hold society together is to decrease the need for money. However, that puts the slave state in jeopardy and additional force is deemed to be required.
"....failed to create work or never intended to in the first place" .
Completely agree. It was PLANNED to ship our jobs overseas by the banksters, so they could issue loans for factories, infrastructure, and import/export tranactions.
The banks paid off the politicians to look the other way....
Yes. Devaluation is STILL the only way out.
2008 was a death blow to america, for 100yrs the fed and it's owners, it's political cronies, and it's powerfully placed, highly paid employees,"ie hank Paulson" schemed, legislated, and waited for a 2008.
it wasn't just luck that in 2008 in one room, sitting at one table a handful of people knew how to fix Americas financial future, and then proceded to legally redistribute the assets of past generations of hard working americans, and the assets of all forseeable generations to come,at that table in 2008 those few tossed the constitution into the trash can, probably forever.
since 2008 three's been no free, and open market, all there's been is crony unconstitutional legislation.
people laugh when there's comments that Americas turned into a third world country, but it's factual.
all that's happening now is making sure the govt. enough money to keep the ebt's working
to me it's almost laughable, people still trying to get rich in today's markets" the fed casino", what if you managed to make a few million, or even billion, what would you do?
how many millionaires, or billionaries do see out in public in 3rd world countries, enjoying themselves, and spending money?
another thing I find laughable these govt.agencies, and law-enforcement groups, having 100,000's of automatic fire-arms, and billions of rounds of ammunition.
lets just start with the basic 3rd world senerio, the atm's, and ebt's are shut-down, there will probably be 75% of Americas law-enforment that wo'nt even show up to work,
how many rounds of ammo will it take to stop 2,000,000 citizens living in south, and west Chicago, heading northeast to claim what they been told was stolen from them by the rich, from our president, right down to the politician running for city council?
how many rounds would it take to keep the citizens of 3 bouroughs in nyc heading north to get whats been told was stolen from them?
there are 2-3 dozen more cities, same situation
all thier stock-piles, of guns,and ammo will be used or stolen from them to be used by others on them, within a week.
I don't see anything left in america tbtf, 2008 killed america, now the other countries are just waiting for america to have it's ruinous un-civil war.
The "wealth effect". Make you and your cronies fabulously wealthy through ZIRP and QE and hope it trickles down into the economy. Or not.
The stock market historically has gone sideways to down for periods of a decade or more and the economy still grew during the period. In fact, it grew faster then than it has during this last Fed induced hyperbubble. Artificially inflating financial assets, most especially when you telegraph when you are going to do it, causes the greatest malinvestment of productive assets possible. Financialization through stock buybacks and all the other non-productive uses of captial causes funds that would have been driven into long term, broad, economy building activites to be diverted into pure speculation that only benefits a very small minority, and then only temporarily. Horrible economic policy that will result in another crash. It's only a matter of when.
THERE IS NO STOCK MARKET!