The Dow Transports managed a bounce yesterday. The Dow Industrials just couldn’t get in the mood. They ended the day with a small decline.
From financial commentator Wolf Richter:
‘80% of the stocks in the Russell 3000 [a good proxy for the entire US stock market] are 10% or more below their highs, according to Bloomberg. Many of them have gotten demolished. Some have gone bankrupt as the appetite for high-risk debt at these low yields is drying up.’
Whether this is the beginning of a major correction or not, we don’t know. We haven’t gotten the email.
But with the Federal Reserve ending QE this month, it seems likely that something will give. Zero interest rates and QE bailed out the financial sector, stabilized housing and helped send the S&P 500 up 130% from its March 2009 low.
What will the end of QE do?
We don’t know, but we’re eager to find out.
Japan and Europe are pumping out trillions of yen and euro in new credit. In the US, Janet Yellen hopes and prays this will be enough to hold off trouble worldwide. Without substantial global liquidity, the US stock market is likely to keep going down.
Money nobody earned
That is what we’re hoping for: a big selloff. Not that we want to see people lose money; what do you take us for?
But we’ve been watching this show for many years now. We want to see how it turns out.
To bring you up to date, in 1968, the US switched from gold to the kind of money that grows on trees. That’s when President Johnson asked Congress to end the requirement that dollars be backed by gold.
It allowed a huge increase in credit…and debt. Thirty-seven trillion dollars in excess credit allowed Americans to live beyond their means for decades. They were spending money that nobody earned or saved.
Year after year — through Democrat and Republican administrations…through good times and bad — debt continued to build up.
And as time went by debt became more important. The US economy…US financial assets…US lifestyles…and the US federal government all came to depend on it. None could survive in its present form if it were forced to live on what was actually earned.
When the US stock market crashed in 1987 Alan Greenspan came to the rescue with more EZ money.
It was a daring and provocative move; never before had the nation’s chief central banker expressed such an interest in stock prices. Previously, Mr Market was responsible for the stock market; Mr Central Banker stayed out of his way.
And ever since, central bankers have taken upon themselves the grave and absurd task of guarding speculators’ backs. That’s why the Fed intervened so eagerly in the markets in 2001 and again in 2008.
The Fed may not be able to spot a bubble, but it has no such trouble when it comes to busts. And although it has no interest in pricking a bubble, it treats a bear market as though it were an Ebola epidemic. Whenever there is the slightest hint of an outbreak, it rushes in with hoses and disinfectant.
That’s why we are so interested to see what happens next.
Will the Fed come to its senses and let Mr Market do his work? Will it allow investment mistakes to be corrected quickly and naturally? Or will it meddle once again…and make them worse?
Perhaps we will find out soon…
For The Daily Reckoning Australia