FacebookTwitterRedditEmail

Markets Gone Mad

Imagine your doctor put you on a daily dose of oxycontin, phenobarbital and Quaaludes for six years straight. Then he suddenly cancelled your prescription.

Do you think your behavior might become a bit erratic?

This is what’s going on with the stock market. It’s trying to shake off six years of overmedication brought on by the Fed’s zero rates and liquidity injections. 

Let me explain: Until recently, stocks had been on a tear that pushed valuations into the stratosphere. Volatility stayed low because Bernanke’s easy money and QE made investors more placid, serene and mellow. They ventured further out on the risk curve and took more chances because they were convinced that the Fed “had their back” and that there was nothing to worry about. 

Then things began to fall apart. The Fed ended its asset purchase program and started talking about “normalization”, an opaque term  the Fed uses to avoid the harsher sounding “rate hikes.” This is what began to rouse investors from their drug-induced trance. The era of cheap money was coming to an end. The punch bowl was being taken away.

Then– just as the Fed’s surging liquidity had calmed the markets for six years– the absence of liquidity and high-frequency trading sent stocks gyrating wildly for months on end. The markets became unpredictable, convulsive, topsy-turvy. And while rates remained fixed at zero throughout, the mere anticipation of higher rates was enough to ignite a sustained period of extreme volatility unlike anything traders had ever seen before.  By taking its foot off the gas pedal and trying to restore traditional market dynamics, the Fed had slammed the vehicle into reverse unleashing pandemonium across global markets. 

Naturally, the pundits tried to blame the mayhem on China or emerging markets or droopy commodities prices or even deflation. But it’s all baloney. The source of the problem is the Fed’s easy money policies, that’s what created the disconnect between valuations and fundamentals, that’s what sent stock prices to the moon, and that’s what inflated this ginormous stock-and-bond bubble that is just now beginning to unwind. China might have been the trigger, but it’s certainly not the cause. 

Last Thursday, the unthinkable finally happened: The FOMC issued a statement that the interest rates would not be raised after all, but that ultra-accommodative policies would remain in place for the foreseeable future. On similar occasions, the markets have always rallied in gratitude for more-of-the-same easing. But not this time. This time, the Dow Jones surged 100 points before cratering 299 into the next session.

“Ah, the Fed has lost its magic touch”, the analysts opined.  The promise of zero rates was no longer enough to push stocks higher. What does this mean?  If the Fed does not have supernatural powers, then who will keep the markets from plunging? Who will keep the bubble intact? Who will save us from a painful correction?

Nobody knows. 

What we do know is that stocks are currently rising on the back of cheap credit that is being diverted into Mergers and Acquisitions (M&A) and stock buybacks. Corporate debt continues to grow even while earnings and revenues shrink. In other words, the Fed’s perverse incentives (zero rates) have seduced corporations into piling on record debt for financial engineering and asset stripping, while investment in building up their companies for future growth (Capex)  has fallen to post war lows. That’s the kind of shenanigans that’s driving the markets.

Corporations have been riding the crest for the last three years, refinancing more than $1 trillion per year from 2012 to 2015. But tighter credit conditions and mounting debt servicing is expected to curb their appetite for more borrowing dampening the prospects for higher stock prices. The same rule applies to stock buybacks. When equities prices flatten  out or drift lower, and debt gets more pricey, share repurchases no longer make sense. So, you can see that –even if rates stay low– tighter credit and extra debt servicing is going to pull the rug out from under the market and put stocks into a deep freeze. 

The point is, the Fed knows what’s going on but just looks the other way. They know their easy money isn’t building a strong, sustainable recovery. They know it’s being used to beef up leverage on risky bets so dodgy speculators can make a killing. They know it all, but they don’t give a rip. They just want to keep the game going a little bit longer, that’s all that matters to them.  Heck, maybe Yellen has convinced herself that she can pull a rabbit out of her hat at the last minute and save us all from disaster?  It’s possible, but I doubt it.  I think she knows we’re goners. The economy is soft, the markets are zig-zagging wildly, and the whole bloody contraption looks like it’s ready to blow. She must know that the game is just about over.

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

bernie-the-sandernistas-cover-344x550
December 05, 2019
Colin Todhunter
Don’t Look, Don’t See: Time for Honest Media Reporting on Impacts of Pesticides
Nick Pemberton
Gen Z and Free Speech
Bob Lord
The U-Turn That Made America Staggeringly Unequal
Josh White
The Most Important Election in British History
Daniel Warner
The Hillsborough Soccer Tragedy: Who is Responsible?
Dean Baker
The Big Deal in Warren’s Prescription Drug Plan
George Ochenski
Another Utility Disaster Headed Our Way
Binoy Kampmark
Spying on Assange: the Spanish Case Takes a Turn
Victor Grossman
Big Rallies and Big Differences in Germany
L. Ali Khan
A Playboy Misrules Pakistan
William J. Astore
How American Exceptionalism is Killing the Planet
Susie Day
The Mad Activist Impeaches Western Culture
Andrés Castro
Look Out for the Drift
December 04, 2019
Jefferson Morley
RIP Fred Hampton: a Black Visionary Assassinated by the FBI
Vijay Prashad
Wealthy Countries’ Approach to Climate Change Condemns Hundreds of Millions of People to Suffer
Kenneth Surin
The Tory Election “Campaign” to Date
Maria Paez Victor
Indians Shall Not Govern
Peter Lackowski
Bolivia’s Five Hundred-Year Rebellion
Dave Lindorff
Billionaire Entitlement Run Amok: the Case of Michael Bloomberg
Doug Johnson Hatlem
Is Corbyn for Christmas Just Another Stove Pipe-Dream?
Howard Lisnoff
Elizabeth Warren: Savior of a Fallen System?
Robert Fisk
The Remembrance Poppy is Becoming a Weapon Against Immigrants to Canada
Dean Baker
NAFTA was About Redistributing Wealth Upwards
Richard Greeman
French Unions and Yellow Vests Converge, Launch General Strike
Binoy Kampmark
Legitimised Surveillance: Kim Dotcom’s Case Against GCSB
Walter Clemens
Goodbye Law and Morality, Welcome Pretend Tough!
Sam Pizzigati
Football Without Billionaires? Why Not?
Anthony Giattino
Royal Forests of America
December 03, 2019
Richard Lachmann
Can the US Get Out of Its Endless Wars?
Ramzy Baroud
Israel’s Unfinished ‘Coup’
David Rosen
The Dialectics of Postmodern Sexual Identity
Robert Fisk
Reporting Syria: I Talked to Everyone, Except Assad
Patrick Cockburn
Why the Resignation of Iraq’s Prime Minister May Not Stop the Mass Uprising on the Horizon
Norman Solomon
For Corporate Media, It’s ‘Anybody But Sanders or Warren’
Bob Scofield
Uruguay Turns to the Right
Joe Emersberger
Talking About Ecuador’s Political Prisoners: an Interview With Marcela Aguiñaga
Medea Benjamin
Trump Was Right: NATO Should Be Obsolete
Nyla Ali Khan
Lesson in Diplomacy for India’s Consul General Sandeep Chakravorty
William Gudal
The Bubble Machine
Gaither Stewart
Dirty Hands
Peter Certo
End the Wars, Win the Antiwar Vote
Binoy Kampmark
The Liveris Formula: Dow’s Inclusive Capitalism
Dan Bacher
California Freezes New Fracking Permits – But All Oil Drilling Permits Still Outpace 2018
Kay Sather
Can’t Get No Satisfaction?
December 02, 2019
Rob Urie
Ukraine, the New Cold War and the Politics of Impeachment
FacebookTwitterRedditEmail