As the end of the latest quantitative easing program approached, everyone was wondering if history would repeat in the form of a stock market correction that terrified the government into another round of debt monetization. And right on cue, volatility surged in late September, sending US stocks down by about 6% by mid-October.

And even that tepid bit of excitement was enough to send the Fed's spinners into action:

James Bullard: Fed Should Consider Delaying The End Of QE

James Bullard, President of the St. Louis Federal Reserve Bank, told Bloomberg Television's economics editor Michael McKee today that the Fed should consider delaying the end of QE.

Bullard said, "I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So...continue with QE at a very low level as we have it right now. And then assess our options going forward."

That was literally all it took. No concrete action, no pulling out the bazooka, just some regional Fed chair whom 99.9% of Americans have never heard of speculating that maybe the end of tapering should be delayed by few months. And the markets went volatile on the upside, recouping most of the previous couple of weeks' losses in a few days.

Dow 1-Month Chart

Somewhere out there a bunch of Fed suits are sitting around a conference table laughing about how easy it is to manipulate today's "investors". After a decade of artificially-low interest rates, massive debt monetization, trillion-dollar bank bailouts and who knows what other kinds of secret interventions in what used to be free markets, the leveraged speculating community no longer cares about fundamentals. Instead it's all about the flow of newly-created currency from the world's central banks. When the spigot is on, buy. When it's off, sell. This has turned out to be one of the easiest periods in financial history to run money on the "don't fight the Fed" system.

So now what? Another burst of asset price inflation that takes small cap equities and junk bonds to the moon? Maybe. The new money has to flow somewhere, and with Europe joining the debt monetization party there might soon be a lot of money indeed sloshing around a global financial system with relatively few attractive choices.

But there's a reason that unlimited money creation has never been an easy path to affluence: It only works for a short while and is inevitably followed by a period of chaos as all the malinvestment generated when money was too easy causes various kinds of crises.

In any event, the question that should be on everyone's mind isn't whether the Fed will keep QE going, but why, after five years of epic debt monetization and record low interest rates, inflation expectations are, as Ballard notes, plunging. The Keynesian answer is that $30 trillion (or whatever the true number turns out to be) wasn't enough. $50 trillion, they assert, would have returned the world to steady, sustainable growth.

For lack of another politically-marketable policy option, the "more is better" crowd will get what they want in 2015, when something will happen somewhere to scare the world's central banks into a coordinated attempt to inflate away their past mistakes.

By John Rubino

dollarcollapse.com

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Comments

HarrisD
29 Oct 14, 00:21

FED Impact and Falling Inflation

Dear John,

Yes, entirely agree with your article about how easy it is for the FED to issue press releases that have a major impact on the US stock market. And for that matter the world markets.

This was also evident during the summer of 2013 when we went through a period from May to December of first being told no tapering of QE3 then being told that tapering is back on, only to be told its off again. Finally, the icing on the cake was when Larry Summers was put forward as a last minute 'hawkish' candidate for FED chair, only to drop out of the race when the market reached a low in the autumn. Real theatre !! Real puppet mastery !!! Think about how long Janet Yellen had been groomed for the role of FED chair only to have Larry pop out from nowhere to be considered as a viable option. What a show !!

Looking back, a huge amount of steam was taken out of the market from May 2013 to October 2013 by a program of well timed press releases that were mostly polar opposites. The final decision to taper that came later in Q4 was the only real action that took place all year by the FED.

At the end of 2013, some of the key US market indexes (S&P 500, NASDAQ & RUSSEL 2K) were starting to move into the early stages of bubble formation. Only the DOW JONES Ind. Avg. remained in sane territory, since the index is mostly made up of value stock which grow slowly and steadily in price. The FED knew that it needed to take some steam out of the market before a real bubble started to form. That would really have been like letting the Genie out of the bottle. The FED's tapering came just in time.

As far as inflation is concerned, my understanding is that we are in the late stages of the Kondratieff wave (the winter stage) and we are now moving into a period of major asset deflation before a new multi-decade credit cycle begins all over again. We are going to see a major US stock market top form at the end of 2014, before indexes fall as we head into 2015 and 2016.

Cheers,

David

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.