Markets Are Expecting The Federal Reserve To Save Them – It’s Not Going To Happen

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This article was written by Brandon Smith and originally published at Birch Gold Group

I have said it many times in the past but I’ll say it here again: Stock markets are a trailing indicator of economic health, not a leading indicator. Rising stock prices are not a signal of future economic stability and when stocks fall it’s usually after years of declines in other sectors of the financial system. Collapsing stocks are not the “cause” of an economic crisis, they are just a delayed symptom of a crisis that was always there.

Anyone who started investing after the crash of 2008 probably has zero concept of how markets are supposed to behave and what they represent to the rest of the economy. They have never seen stocks move freely without central bank interference and they have only witnessed brief glimpses of true price discovery.

With each new leg down in markets one can now predict every couple of months or so with relative certainty that investor sentiment will turn to assumptions that the Federal Reserve is going to leap in with new stimulus measures. This is not supposed to be normal, but they can’t really help it, they were trained over the past 14 years to expect QE like clockwork whenever markets took a dip of 10% or more. The problem is that conditions have changed dramatically in terms of credit conditions and price environment and it was all those trillions of QE dollars that ultimately created this mess.

Many alternative economists, myself included, saw this threat coming miles away and years ahead of time. In my article ‘The Economic End Game Continues’, published in 2017, I outlined the inevitable outcome of the global QE bonanza:

“The changing of the Fed chair is absolutely meaningless as far as policy is concerned. Jerome Powell will continue the same exact initiatives as Yellen; stimulus will be removed, rates will be hiked and the balance sheet will be reduced, leaving the massive market bubble the Fed originally created vulnerable to implosion.

An observant person…might have noticed that central banks around the world seem to be acting in a coordinated fashion to remove stimulus support from markets and raise interest rates, cutting off supply lines of easy money that have long been a crutch for our crippled economy.”

The Fed supports markets through easy money that feeds stock buybacks, and it’s primarily buybacks that kept stocks alive for all these years. It should be noted that as indexes like the S&P 500 plunged 20% or more in in the first six months of 2022, buybacks also decreased by 21.8% in the same time period. That is to say, there seems to be a direct relationship between the level of stock buybacks and the number of companies participating vs the decline of stocks overall.

And why did buybacks decline? Because the Fed is raising interest rates and the easy money is disappearing.

If buybacks are the primary determinant of stock market prices, then the participation of individual investors is mostly meaningless. Stocks cannot sustain on the backs of regular investors because regular investors don’t have enough capital to keep markets afloat. Companies must continue to buy their own shares in order to artificially prop up prices, and they need cheap Fed money to do that. Stocks are therefore an illusion built only on the whims of the Fed.

And the reason for the Fed’s dramatic shift away from stimulus and into tightening? One could argue that it’s merely the natural end result of inflationary manipulation; that central banks like the Fed were ignorant or arrogant and they weren’t thinking ahead about the consequences. Except, this is false. The Fed knew EXACTLY what it was doing the whole time, and here’s the proof…

Way back in 2012 before Jerome Powell became Fed Chairman, he warned of a market crisis if the central bank was to hike rates into economic weakness after so many years of acclimating the system to easy money and QE. During the October 2012 Fed meeting Powell stated:

“…I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”………more here

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