Countdown to Fed Flip

Since 2009, when incoming president Barack Obama admitted targeting stock market prices with TARP (Troubled Asset Relief Plan) TALF (Term Asset-Backed Securities Loan Facility), the prevailing wisdom in the United States of America has been that stocks only go up if Quantitative Easing is pumping up the market.

It is utterly lost on American financial types that the performance of the S&P 500 (INDEXSP: .INX), NASDAQ (INDEXNASDAQ: NDX) and Dow (INDEXDJX: .DJI) is due almost entirely to these massive government corporate welfare programs.


So it is no surprise that the delusional American investor now believes that the Fed is obligated to print money in order to maintain a rising stock market.

The Wall Street Journal today published a headline that reads, “Stocks Historically Don’t Bottom Out Until the Fed Eases”.

Now while the Wall Street Journal routinely subordinates journalistic standards to the perception management requirements of its board members and advertisers, this headline stands out as a remarkable piece of propaganda designed to pressure the Fed into reversing course.

To imply that there is a “historical” correlation to stock markets only bottoming out after Fed welfare injection is laughable. The stock market bottoms out on corrective downturns when the correction has exhausted its momentum, just as the bull phase reverses when it loses its momentum.

There is no argument that the Fed announcing $120 billion a month in asset purchases, which itself creates the ability of banks to fractionally bank that out to $1.2 trillion a month in liquidity, is a fundamental catalyst to the upside.

But it also underscores just how false the valuations in the major indices in America really are.

I estimate that the Fed can tolerate nothing greater than a drop on NASDAQ to 8,000 (which is definitely where it is going if the Fed doesn’t pump in more welfare dollars). 

I’m assuming they (the Fed) understand that the entrenched rampant inflation that they insisted only months ago would be “transitory” is the principal driver of the inflation that causes excessive price competition for the available global real asset inventory. Although that is no certainty since they kept clinging to this ridiculous notion that inflation would be kept to 2% despite trillions of dollars flooding the system.

There is a whole new generation of investors who believe, by the Fed’s example, that:

  1. There are two tiers of law applied in the United States governing market manipulation and insider trading;
  2. Stocks only go up when the Fed is injecting monthly stimulus;
  3. Synthetic assets are as safe as real assets.

The crypto meltdown now engulfing newly minted digital fortunes of youngsters around the world who for whatever reason failed to read history is only one byproduct of a Fed whose mandate to “foster maximum employment and financial stability” has been revealed to be a total sham.

Don’t even bother going to read how the US manages to report rosy employment numbers despite massive unemployment. (They just change the definition of who is employable to achieve these stats.)

Given the Fed’s responsiveness to stock market reactions whenever it tries to reduce the pace of welfare injections into the market, the WSJ article is right about one thing: Markets will not bottom out until the Fed reverses course and starts dumping billions into the market every month.

The fact that this is the single most compounding factor to inflation will likely not deter the Fed from such a reversal; after all, the rich don’t feel the pinch of inflation nearly as acutely as the 90% of Americans who aren’t rich.

The only question is, to what extent will the Fed have to pump in order to reverse the stock market dump? I mean, when you’re running the world’s largest and most continuous pump and dump in history, how do you continue to impress when the size of your stimulus is already unfathomable?

“Kicking the can down the road” was the media buzzphrase to describe ongoing stimulus and Zero Interest Rate Policy (ZIRP). You’ll notice that term is no longer used by complicit mainstream financial news outlets. 

I guess it was a bit too close to the truth.

Prediction: Look for the Fed to announce major stimulus renewal as soon as NASDAQ hits 8,000….or sooner.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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