The end of the game and the rabbit hole
For a stock market to collapse, prices must fall. It’s obvious. But what if stocks go up and the value of money goes down? Is it a crash? If the value of silver drops 30% but the market goes up a bit, is it a bull market?
Few would dispute the premise that it was the Federal Reserve’s liquidity actions that made the US stock market levitate. Unfortunately, in an attempt to keep the entire economy from imploding, the value of stock market assets has ballooned to ridiculous levels. Jay Powell, the chairman of the Fed, made it clear in a recent interview that they are committed to supporting the US economy and protecting it from the effects of anti-Covid measures, for as long as needed and as long as needed, and clearly indicated that it would be for a long time.
Here is the trend of this support from the Federal Reserve:
(Graphic courtesy of the Federal Reserve’s website)
That QE or whatever mark you want to give to that liquidity provision (liquidity equals cash, provision equals printing assets that turn into money) is clearly going to last for a long time, because every time the Fed loosens its swap of new government-backed assets for other people’s more sketchy assets, lowers the stock market, then increases QE to keep the market from collapsing like Hindenburg in flames.
When the Fed declined in 2019, the market fell and the crash went to peripheral global economies as US dollars were sucked into the global economic plumbing. The United States and the world economy are addicted to money printing from the Federal Reserve. By swapping the golden government debt for the riskier, if not very risky, debt of other parties, the Fed is pulling questionable asset holders around the world by the hair, preventing a spiral of insolvency. The potential damage from this terrifying surge is the root of all bailouts, allowing shattered businesses and economies to falter, most likely to even greater fragility.
The strange thing is this: If these liquidity operations continue, the Federal Reserve will in fact own all of its citizens’ homes and all of its solvent (and less solvent) corporate debt and thus have liens on the bank. most of the economic assets of its citizens and producers. He will indeed have nationalized, but probably by accident, the country, after having bought it with state papers. However, if that puts an end to this process, the market will collapse and everyone will instantly be a lot poorer, while if it continues at some point, it will clog the market for its paper, interest rates. will rise and interest rates will fall. bond value and the reality of a much poorer economy will bite.
However, it looks like the Federal Reserve will not let the stock market crash, no matter what the outcome.
But if a dollar in 2023 or 2024 buys much less and the market hasn’t exploded as a result, you’re getting your reset chronically rather than through an acute event of your portfolio shrinking by 30%. It will be the goal, again, to smooth the process over a decade or two rather than endure the pain of a terrible three or three years of restructuring.
Yet, make no mistake, the US stock market is a house of cards, and as the Malaysians discovered when they supported the price of tin, there is a finite nature to keeping a market away from. its natural balance and you have to spend increasing amounts to do so. At some point you run out of credit and the market drops to its correct level. How long can the United States continue to depreciate its credit while maintaining its credibility is the key question in this ongoing drama and every country in its time has gone beyond this point and sank into crisis. If the United States chooses to corner its markets, that time will quickly approach. With continuous QE, the system will become even more fragile, so the catalyst needed to break through that fixed corner of the market will get smaller and smaller until the slightest nudge breaks the spell.
Inflation solves all these problems because it gives economic activity the opportunity to rebalance itself, as few can keep up with all the different developing prices. It prompts people to circulate their money and crushes debt with negative real interest rates and also stealthily rebalances the real value of those debts. Turning inflation on and off is a known fact, even though central banks ridiculously pretend otherwise.
But will the stock market collapse now? Hearing Jay Powell speak, it looks like they are ready to die on QE Hill. The market will therefore not be able to follow its natural course. This means that the market is going to collapse, but only when and if there is a point of fall. There has to be a readjustment for a global economy that has lost at least 10% of its production with even more damage to come.
Some governments will aim for chronic economic development while others will opt for acute development if they can put the blame on someone or something else.
As such, investors should pray that the incoming new US administration does not find a scapegoat to blame a reset on, to eliminate this early in their tenure.
For anyone who isn’t a die-hard buy and hold, the near future has to be one where an investor’s fingers should stay hovering near that sell button because the tightrope that the Fed is walking for the sake of. United States and the world economy is going to be a precarious one.
Chambers won the Journalist of the Year award in the Business Market Commentary category at the State Street UK Institutional Press Awards in 2018.