Dear Wall Street Insights & Indictments Reader,
Just look at the market today, any market, anywhere in the world. They’re all higher.
What are those “purposes” and how much “control” does the Fed really have?
The short answers to those questions will sicken and frighten you…
But first, a word about surging equity markets.
U.S. markets leaped higher yesterday propelled by molten lava (heated by the Fed), which blew the top off the cone of equity malaise capping stocks in the first days of 2015.
Asian markets took notice this morning and immediately joined the party. Not to be outdone – and without a doubt the guests of honor who were being liquored up in the process – European stock markets popped their own corks and soared higher. So, when U.S. markets opened a few hours later, it was one for all and all for reaching for the moon.
Grab your glass and get your boogie on – it’s a world party!
The molten lava forcing the blow-off top in equities bubbled out of the Fed’s December 16-17, 2014, meeting minutes, which were released yesterday morning.
In a highly unusual public pronouncement (sure, they were minutes of the Fed’s private meetings, but they are made public, so they were public pronouncements), the Masters of Manipulation warned they were worried about slow economic growth outside the United States.
Specifically, the Fed said it was worried “foreign policy responses [to slowing growth] were insufficient.” That’s “Fedspeak,” over a loudspeaker screaming to their counterparts at every other central bank on the planet, for “PRINT MORE MONEY, YOU IDIOTS.”
But it’s not slowing growth the Fed is really worried about. It’s how artificially pumped-up equity markets (courtesy of the trillions of dollars of already printed money, aka stimulus or, more colloquially, quantitative easing) will react if the free-money ride slows down or stops.
How do we know that’s what the Fed is afraid of? Because it said so. The Fed minutes warned financial markets are “importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan.”
That means frenetic equity markets will crash if they don’t get more cocaine up their snouts.
That’s how Masters of the Universe pump up stock markets – by masterly manipulation.
So, what is their “purpose” and how much “control” does the Fed really have?
Unless your existence in the equity bubble has left you deaf, the Fed has for years openly articulated a “wealth-effect” policy. It wants to pump up stock prices to make us all feel wealthier. Some of us are wealthier, if we own a lot of stocks. Most of us don’t own enough stocks or any stocks, so we only feel the rich getting richer.
But, whatever, that’s the wealth effect.
As long as equity prices are rising, banks’ equity capital is worth more and they make more money in rising equity markets from investment banking, mergers and acquisitions (M&A), and trading.
Of course, the juice for all that activity comes from low interest rates.
At the same time, the Fed is carrying the deficit-ridden U.S. government by buying its debt.
That’s the purpose of zero interest rate policies (ZIRP) – to pump up equities, enrich big banks and monetize government debt.
That’s the purpose of central bank “stimulus” all over the world.
The problem is in the “control” mechanism.
If the Fed loses control of U.S. equity markets, if other central banks lose control of their equity markets, it’s game over. The wealth effect will disappear, and banks will collapse.
So, here’s what the Fed intended by incorporating the language it did in its most recent minutes, for the world to read.
The Fed warned other central banks to keep the free-money hoses turned on in order to force equity markets higher. Markets read that and rallied, because the Fed is the Master of the Masters of the Universe and just proved to its counterparts that stimulus is the way forward.
However, the last word on “control” goes to the markets themselves. Try as central banks might, as big as they are, as much capital as they pretend they have to spray on stocks, they are not anywhere near as big as the markets.
Control is a fantasy.
Of course, equity markets are higher. They’re all Pavlov’s dogs.
But one day, the atavistic tendencies of markets, meaning their animal nature, will prove the distorted headline “Man Bites Dog” was a misprint.