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.

Weekend Edition
July 03, 2020
Friday - Sunday
Peter Linebaugh
Police and the Wealth of Nations: Déjà Vu or Unfinished Business?
Rob Urie
Class, Race and Power
John Davis
A Requiem for George Floyd
Jeffrey St. Clair
Roaming Charges: Mutiny of the Bounties!
Richard D. Wolff
Revolutionary Possibilities: Could U.S. Capitalism Turn Nationalist?
Richard Falk
When Rogue States Sanction the International Criminal Court
Louis Proyect
Smearing Black Lives Matter…From the Left
Ralph Nader
Trump and Pence – Step Aside for Professional Pandemic Scientists and Managers
Ramzy Baroud
Tearing Down the Idols of Colonialism: Why Tunisia, Africa Must Demand French Apology
Philippe Marlière
Challenging the French Republic’s Color-Blindness
Richard C. Gross
Attack, Deny
Lee Camp
Connecting the Dates – US Media Used To Stop The ‘Threat’ of Peace
Steve Martinot
The Desire to Kill
David Yearsley
The War on Kitsch
Amy Eva Alberts Warren – Rev. William Alberts
Why are Certain Christians Democratic and Others Authoritarian?
Lawrence Davidson
Covid Madness
Brian Cloughley
Britain’s Disorder and Decline
Ellen Taylor
The US Military Has Its Knee on the Throat of the World
David Rosen
White Nationalists on the Attack
Jeff Cohen
Politicians of Color Should Not be Immune From Criticism
Joseph Natoli
Drawn Away from Reality in Plain View
Frank Joyce
Give Me Liberty,  Give You Death
Jonah Raskin
My Adventures in the Matriarchy
Paul Street
The Racist Counter-Revolution of 1776
Kollibri terre Sonnenblume
The Corruption of the Democratic Party: Talking to Ted Rall about his new book
Medea Benjamin - Nicolas J. S. Davies
Trump’s Record on Foreign Policy: Lost Wars, New Conflicts and Broken Promises
Paul Edwards
A Bridge Too Far
Jennifer Joan Thompson
How to Do Things With Theses: Chile’s National Police Force Sues the Feminist Artistic Collective, Las Tesis
Shawn Fremstad
Vacations for All!
Thomas Knapp
A Modest Proposal for Compromise on “Confederate” Military Bases
Vijay Prashad, Eduardo Viloria Daboín, Ana Maldonado, and Zoe PC
Venezuela’s Borderlands Have Been Assaulted by COVID-19
Thom Hartmann
COVID Masks: The Latest Faux Conservative Outrage
Jesse Jackson
Mandatory College Football Practices in Time of Pandemic are Nuts
Nicholas Vincenzo Barney
Consensus Politics on the Fringe: The Intellectual Dishonesty of the Intellectual Dark Web
Ted Rall
The Data is Clear: Progressives Should Boycott Biden
Joshua Tartakovsky
Sergei Khrushchev: An Eulogy from His Close Student
Theresa Church
In Reconsidering ‘Normalcy’ Genetically Engineered Trees Do Not Belong
Chelsea Carrick
Let’s Not Lose Momentum
Adam Rissien
Sorry Secretary Perdue, Our National Forests are Not Crops
Paul Gilk
A Few Theoretical Percentages
Thomas S. Harrington
“New Corona Cases”:  A Phrase That’s Tells us Very Little, if Anything,  About the Actual Levels of Danger We  Face
Claire Chadwick
I Got COVID-19 at Work. I Won’t be the Last
George Wuerthner
The Upper Green River Should be a National Park, Not a Feedlot
Julian Vigo
Profiteering in the Era of COVID-19
Ravi Mangla
Policing is Not a Public Good
FacebookTwitterRedditEmail