Why the Fed Will Keep at it Until the Bitter End

I know what you’re thinking, punk. You’re thinking: “Did he fire six shots or only five?” Now to tell you the truth I forgot myself in all this excitement. But being this is a .44 Magnum, the most powerful handgun in the world, and will blow your head clean off, you’ve gotta ask yourself a question: “Do I feel lucky?”

Well, do ya, punk?

– “Dirty” Harry Callahan, Dirty Harry

The Dow finally broke its losing streak.

Nothing dramatic. Nothing conclusive. Or even persuasive.

Stocks are going up…or down. No one knows for sure.

We’re not gamblers. So we’re out of US stocks…and our ‘Crash Alert’ flag flies…not because we think stocks are going down, but because we think the weight of risk lies on the downside.

That said, the feds have added $3 trillion in cash and some $23 trillion in credit guarantees over the last five years. Something had to happen to the money, right?

Don’t bother looking for it in the trailer parks. Hourly wages are no higher. And fewer people (as a percentage of the workforce) have jobs than ever before.

Household incomes are stagnant. So you won’t find it under middle-class seat cushions, either…

Real estate? Ultra-low mortgage rates hardly hurt…

But only stocks have skyrocketed…

According to former Merrill Lynch economist David Rosenberg, since the March 2009 low there has been a near-perfect correlation between a higher S&P 500 and the expansion of the Fed’s balance sheet.

So, we can plausibly assume the Federal Reserve will continue to push up stock prices – at a rate of about $85 billion per month…or about $1 trillion a year.

We may even assume that, by back-tracking on its own forward guidance, the Federal Reserve has now embarked on a new stage of perpetual money-pumping. And that investors might now anticipate trillions more dollars’ worth of stock buying.

From bearish fund manager John Hussman:

Investors may draw on this decision as evidence that the Federal Open Market Committee (FOMC) has placed a safety net below the market… and that the surprising extension of its current policies could spark a short-term speculative blow-off top.

We don’t deny it. Under these conditions, the bulls might be right. They might bet on a blow-off with much higher stock prices. They might make money.

Dear readers who are feeling lucky might take a chance. Buy some call options. Who knows? They could pay off big!

But dear readers are warned: Gamblers gotta know when to fold ’em…and know when to walk away, too.

A bet on a blow-off top is a bet that: (1) the economy is not really recovering, (2) the Fed won’t taper, (3) with no real recovery, the cash goes into speculations, and 4) the most likely speculative market is stocks.

This is not a bad bet. ‘As long as the music is playing, you’ve got to get up and dance,‘ said former Citigroup boss Chuck Prince. But it’s risky. Because they don’t hold up cue cards to tell you when they’re going to pull the plug. Instead, as the end approaches, the party grows wilder and wilder.

Ah yes, dear reader, they don’t make it easy. The closer you are to disaster, the harder it is to leave. Just before the blow-off turns into a blow-up, stocks are typically going straight up. Who wants to leave the party then?

When the lights go out, suddenly everybody rushes for the exits. But it’s too late. Bodies pile up in the doorways. It is impossible to get out.

The same is true of the entire Fed intervention. The more the central bank intervenes, the more dependent the economy becomes, and the harder it is to exit. They say they will head for the door when the numbers improve…but as soon as they make a move to the exit, the numbers will collapse.

In this sense, too, the bulls are reading the latest Fed announcement correctly. The Federal Reserve will keep at it until the bitter end. It will feed the market with more cash and credit. Then it will find it impossible to back up. Instead, it will keep going until we get a blow-off top in stock prices.

The bulls don’t realise they are subject to the same phenomenon: Gambling on a blow-off top is hard to stop. Gamblers do not walk away from 100%-a-year gains. They stay at the table…and go right to the end…from the blow-off to the blow-up.

There’s a better way to play this situation. By ‘anti-gambling’…

More coming…


Bill Bonner
for The Daily Reckoning Australia

Join Markets and Money on Google+

From the Archives…

The Fed Does the Reverse Volcker and Targets the US Unemployment Rate
27-09-2013 – Greg Canavan

How Much Juice can Australian Property Have Left?
26-09-2013 – Greg Canavan

Nothing Lasts Forever…Especially Easy Money
25-09-2013 – Chris Mayer

The Unintended Consequences Brewing Thanks to the Federal Reserve
24-09-2013 – Greg Canavan

The Market’s Declining Response To ‘Open Mouth’ Operations
23-09-2013 – Dan Denning

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 Money.

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