The Fed May “Cause” The Next Stock Market Crash
Stock-Markets / Stock Markets 2020 Sep 03, 2020 - 05:43 PM GMTBy: Avi_Gilburt
I know many of you view the Fed as quite omnipotent, with the ability to move the market with a simple stroke of a key. In fact, this perspective is so ubiquitous that I know almost none of you will take my presentation seriously, as “common-think” has taken over most investor’s ability to see the facts presented to us by the market. However, please do recognize that my perspective is based in fact and history, rather than the supposition and fallacy upon which most perspectives in the market are based.
Moreover, I have presented many prognostications in the past which have seemed unrealistic at the time, yet almost all of which have been realized within the fullness of time. So, why not offer another? (smile)
The main premise which is universally accepted is that the Fed can simply “print” money and push it into the stock market to cause the market to rally. In this way, the Fed has supposedly supported the market, and has caused this rally we have been seeing for many years.
To this end, I will again quote a comment I received to one of my recent articles, which explains the common perception on this matter quite clearly:
“[The Fed] will do whatever it takes to keep markets "working properly". Because of that, no one fears a dip, because the market is supported by a money bazooka with infinite ammo. Since no one fears a dip, no one wants to "take profits" and mis-time it. This is FOMO. There is nothing to fear. The underlying financial system is so shaky, the Fed must support it, by creating a wealth affect. If you wait for even a 10% pullback, you'll miss the next 20% bull run.”
However, my position is that this is a commonly accepted fallacy, and I will attempt to prove to you that no one entity, whether it be the government or the Fed, can or does control the market.
So, let’s start with the 2007-2009 market decline. It is commonly accepted that government/Fed intervention is the reason we began to rally off the March 2009 lows. Yet, I take issue with that based upon the facts.
First, for those of us that lived through that crisis and remember it well, it is all too easy to now forget how many “bazookas” the government and Fed threw at the market to prevent that decline. This chart from Elliott Wave International outlines all the failed attempts at preventing that crash, which most of you seem to have forgotten:
So, as we can clearly see from the facts, neither the government nor the Fed was able to prevent the 2007-2009 market melt-down. Yet, I am sure you still view the Fed as being omnipotent and in full control of the market, right?
Well, let’s now consider that the Fed began their quantitative easing process in November of 2008. And, before we explore that a bit further, I want you to understand that the QE process does NOT result in money being printed. That is purely another commonly accepted fallacy.
If you want to understand this perspective a bit more, and what the QE process really does, feel free to read this article I wrote a number of years ago:
http://news.gold-eagle.com/article/explanation-quantitative-easing-uninformed-%E2%80%93-and-mr-armstrong/210
Moreover, whereas many believed to the core of their being that QE would cause the dollar to crash, the actual facts suggest that the dollar began a multi-year rally when QE began. In fact, we called for a multi-year rally BEFORE QE was even begun, even though many thought us crazy going against the Fed and QE.
https://www.elliottwavetrader.net/p/a...
So, did the Fed actually cause the dollar to rally? Well, by looking at the chart, one would almost have to come to that conclusion. So, can we still view the Fed as being omnipotent and in charge of the market?
Now, consider that the Fed began QE in November of 2008. However, the market did not bottom until four months later, and 20% lower. Can we still consider the Fed as being omnipotent and in control of the stock market?
But, almost all of you are still certain that the Fed absolutely caused that bottom in the market, right? Well, I guess that 4 month and 20% lag is close enough for government work. (smile)
Yet, if you have followed Alan Greenspan closely through the years, you would know that he disagrees with your certainty regarding the Fed’s power. In fact, he has outright stated so:
“The cause of economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.”
In fact, he has even explicitly stated what causes a market to bottom, and take note that it has nothing to do with the Fed:
“It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.”
One can even argue, based upon Chairman Greenspan’s last line, that the market could have bottomed in 2008, and the Fed may have delayed that bottom until the following year.
So, should we still continue to view the Fed as being omnipotent and in control of the stock market?
Well, I know most of you are still not convinced. So, let’s fast forward to January of 2014, when the Fed announced it would begin tapering its QE purchases. Based upon the assumption that the market has rallied only because of the Fed, then we must assume a major crash ensued. Yet, even though we saw a pullback in the market, the market still rallied another 10% from the point at which the Fed began to taper. How could it have done so without the continued backing of the Fed?
So, should we still continue to view the Fed as being omnipotent and in control of the stock market?
Let’s now move towards October 2014, when the Fed stopped expanding its balance sheet. Yet, the stock market topped out the month before in September of 2014, and declined 10% even before the Fed ceased its balance sheet expansion.
For those that remember this time period, certainty rose among investors that the market would begin a major crash since the Fed was no longer backing the stock market. Yet, in 2015, I was providing analysis that the market was going to pullback from the 2100 region to the 1800SPX region and begin another multi-year rally, even without any Fed assistance.
Many of you scoffed at my prediction, and those were the “positive” comments to my prediction. Many of you simply shook your heads and thought “there goes crazy-Avi again.” Yet, the market proceeded to rally 1000 points off the 1800 region, which was over a 50% rally during a period of time that not only was the Fed not backing the market, but was actually reducing its balance sheet.
So, should we still continue to view the Fed as being omnipotent and in control of the stock market?
Now, how many of you have said over and over that the market would never be where we are today without the Fed? Well, I beg to differ. And, so do the facts of history.
Let’s now fast forward to the early 2020 time-frame. Again, the market entered into a 35% crash. Was the Fed able to prevent it? Were they even able to slow it?
It certainly does not look like it. And, based upon the timing of their actions, one can even argue they accelerated the decline.
So, should we still continue to view the Fed as being omnipotent and in control of the stock market?
Again, let’s consider the wise words of Alan Greenspan in this regard:
“It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.”
Yet, when the Fed acted near the bottom of the decline in March, most of you were certain that the Fed caused the rally with its next pronouncement of QE-infinity, while ignoring the first sentence of what Chairman Greenspan noted above.
Now, when you consider that we had a bottoming target in the 2187SPX region, and the market bottomed at 2191SPX, what do you think the more reasonable conclusion to be: the Fed “caused” the rally despite being completely ineffective during all its other actions in February and March, or that the market simply exhausted itself to the downside, as per Alan Greenspan?
If you want to continue to wear blinders, that is completely up to you. I am quite confident in my conclusion, and have profited greatly by not following the masses regarding the common perspective about the Fed.
The best recent example I can provide you of this is when I look back to November of 2018. If you remember, the Fed was in the midst of a rate hiking process at the time. Yet, I was telling my members that I was going long the TLT in the expectation of a major rally in the bond market, despite the Fed’s actions. While many voiced their disbelief and told me that I simply cannot fight the Fed, we actually caught the exact low in the bond market at the time, and rode a very profitable long trade, culminating in the Fed being forced to follow the bond market and begin to lower rates again.
So, at the end of the day, the real question you have to ask yourself is how can you believe the Fed controls the market when it cannot prevent 35-60% market declines yet it is completely uninvolved during 50%+ market rallies?
At this point in time, I want to let you in on a little secret. My purpose in writing this type of article is not to convince you whether the Fed is bad or good. Rather, my goal is to open your eyes as to the true power, or lack thereof, that the Fed really has in controlling our market, or preventing a massive decline or market crash.
The reason I do so is so that you can avoid being caught in the trap into which all your fellow investors will fall once we head into a real bear market. While I still see that as several years down the road, I have to at least attempt to convince you into taking off your blinders before it is too late. And, if you do not believe me, simply re-read what the most famous Fed Chairman has said many times over about the Fed’s ability to control markets. But, who wants to believe their lying eyes? (smile)
History has taught us that once mass sentiment turns negative, no entity can stop it. And, once we are finally ripe for a major bear market, neither the government nor the Fed will be able to prevent it. The sooner you wake up to the truth taught to us through history, the sooner you can begin to protect yourself in the coming years rather than place all your hope and reliance upon the Fed or the government.
“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in.” Isaac Asimov
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.
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