The Federal Reserve Will Panic and Climb Even Higher

Whoa! Investors are acting like it’s 2007 all over again.

USA Today has the story:

NEW YORK — Emboldened by soaring stock prices and record-low borrowing costs, stock investors are taking out loans against their portfolios at the fastest pace since before the Great Recession hit.

So-called margin debt hit $379.5 billion in March, the highest level since July 2007 when such debt hit an all-time record of $381.4 billion, according to the most recent data available compiled by the New York Stock Exchange.

The trend signals that investors are more comfortable with stocks and are more willing to use borrowed money to buy more securities in hopes of garnering fatter returns in a hot market that has pushed the Dow Jones industrials up more than 15% in 2013.

Why are investors so bullish? Because the economy is coming back? Because the future is rosy? Because stocks — whose earnings are already in record territory — are going to earn even more?
Nah…what do you take us for, dear reader? We know the story. Stocks are going up because the Federal Reserve is making them go up. Here’s David Rosenberg in Canada’s Financial Post:

The U.S. Fed has always been important in influencing trends in the financial markets, even if the economic effects have been far less than dramatic.

This influence has actually strengthened in recent times to the extent that the correlation between the Fed’s balance sheet and the direction of the stock market, which was barely 15% before all these rounds of quantitative easings began four years ago, is 85% today.

By way of comparison, the time-worn correlation between the market and corporate earnings has remained unchanged at around 70%.

The Fed is trying to bring the overall cost of capital down to a level that would be consistent with a -2.2% Fed funds rate, which is where the rate actually should be based on current inflation and the still-huge amount of excess capacity in the economy.

But the funds rate has been at zero for more than four years. The Fed cannot magically create a negative nominal interest rate, so it is using the powers of its balance sheet to achieve the same result.

This then brings me to my very last point, which is what I think was a critical inflection point when the Federal Reserve said in its December post-meeting press release that it will not budge from its 0% policy rate until the U.S. unemployment rate drops to 6.5%. It is currently around 8%.

We have done estimates based on various assumptions and found that achieving this Holy Grail likely takes us to the opening months of 2018 or another five years of what is otherwise known as financial repression.

But wait a minute. If the Federal Reserve continues goosing up stock prices for another five years, isn’t that going to put stocks in ‘irrational exuberance’ territory? Won’t artificially low interest rates — over such a long period — create the same sort of distortions and bubbles that led to the crisis of ’08–’09 in the first place?

Well…yes…of course.

But the Federal Reserve is on the case. It says so right there in the paper. The Fed governors ‘are considering an exit strategy’. Exit from what? They are trying to figure out how to get down.

For four years they have been climbing up and up — offering loans at negative interest rates…trying to encourage people to borrow and spend. They want people to part with their money, not save it. And they’ve also given the economy more money — QE 1, QE 2, and now QE 3. In the current version of quantitative easing (QE), they print up an extra $85bn a month and pump it into the banking system.

That money hasn’t done much for the real economy — the unemployment rate has gone down, but only because people have left the workforce — but it’s done wonders for stock prices. The Dow has more than doubled since ’09. It’s up this year too — hitting record after record.

Ben Bernanke says he wasn’t targeting equities with his quantitative easing programme. But that’s what he hit…climbing higher and higher to get a good shot. Now, he’s sitting on top of a monetary pile that is four times as tall as it was in ’07.

And now, how will he get the Fed down without getting hurt? If stock prices are so closely correlated to Fed money-printing, won’t stock prices go down if they turn off the presses? And how will the Federal Reserve react when it sees stocks go into another major bear market?

Our guess is that as soon as Bernanke hints at cutting off the presses, stocks will begin to slide. Then, when the presses really stop, they’ll fall hard. That’s when it will get interesting. If the Federal Reserve can’t cut back now…how will it do so when the markets and economy are even more dependent on it?

Instead, the Federal Reserve will panic…and climb even higher.


Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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7 Comments on "The Federal Reserve Will Panic and Climb Even Higher"

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deToke deVille
“…a monetary pile…(!) Good one! ROFL! Bill: you could get the FED heads “Medic Alert”: Help! I’ve ascended, and I can’t get down! {write it off as “charity”} Slewie got “disappeared” by the spookery @: The Tripoli Post! Rats looove waterboarding! Slewie’s going deep. I once personally saw him hold his breath for 18 minutes over one toke of Thai weed! Those fascist goons at the UN will be begging for mercy when Slewie gets done at Gitmo! The guy is amazing! His yoga instructor, Pondurengaduck, said he had developed a “virtual” umbilicus. And by the second class… Of… Read more »
Is the climbing Dow simply a reflection of a falling dollar. The Dow is measured in US$’s. The reserve is printing furiously, the dollar is falling slowly, perhaps the Dow’s climb is simply a truer reflection of the rate at wich the US$ is falling. Foreign finds investors are finding it cheaper to buy US equity’s, the following week they have climbed in value as more investors see the falling US$ make those same shares cheaper still, they then purchase and the price rises. If the foreign investor starts to pull out of the markets what will happen to the… Read more »
Important to keep it real….. Housing starts and oil the drivers? mmmmmmm We know about the housing, but the oil? Population shifts could drive that demand – but where and for what jobs? Going by the student loan delinquincy rates Washington-Virgina have become never land, a bit like Queensland’s Gold Coast for unemployed Victorian factory workers – perhaps that is driving demand. Exports are down big time and the imports are down small time. Industrial production is off. Wall St and the 401K’s driving confidence? Can’t see it in the retail volumes. Elsewhere – government up – productivity down.

Here is the link on the student loans, relevant if you preseume right that household formation for informed (and hence likely ignorant) consensus will follow the emerging students choice of locale:


and of coarse 5 sec later we find that the previous report is revised downwards and the current report is a big fail. Why are these reports always revised in the negative?

and the USD melts up in response.

and maybe the reason really is treason

and I’ll say goodbye to ya ….


Seems like a big money laundering exercise to me.

The fed prints money and pumps it into the banking system (future tax payers get the bill), this pushes up stock prices (someone is making money selling their cheap stocks), punters get on board too late and try to catch up by boring to leverage the run up, then lo and behold the market crashes and the punters get cleaned out. The punters are broke, their kids are broke and the banksters are laughing all the way making heaps now and ensuring that everyone else remains debt slaves.

hesitantly I expose another radical thought radicals almost always get pelted with Medre but I am getting used to it . Americans like everybody else are hard to figure out. their are a large nu ber of people of German origin in America apparent Germans like technology and work this possibly means that if they can control the greedy irresponsible lunatic banks and maybe the ditto lunatic etc media and all that oil they don’t have to import from the middle east that the good old greenback might start going north again. Not north to Canada that still has miions… Read more »
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