The intent of Fed policy has been to stimulate economic growth by keeping interest rates low and printing money. The ultimate goal is to create a level of inflation that resembles growth. Devaluing the dollar makes exports seemingly more attractive. At least, that is the goal. Unfortunately, the ability to stimulate the economy by Fed policy has been debatable. The ability to inflate asset prices is not debatable. The market has surged as a result of Fed policy, that is, until recently.
Rather than my usual rant about why Fed policy will not stimulate growth, or lead to a stable stock and bond market, I will focus on what it will do. I was among the first to write and speak about “unintended consequences” of Fed policy. I am going to attempt to outlive what I consider one of the least talked about, and most obvious unintended consequence; the death of the public market.
What can be said about a market that is under the spell of essentially one man? That man is Ben Bernanke. In the midst of economic and earnings reports, nothing has greater impact than the linguistic stylings of the man himself. Remember, he promised that money printing doesn’t cause asset bubbles. This “man of steel” promises that he will save the market and the economy. Such claims have been the staple of the daily diet of momentum traders and index fund investors world wide. He is the safety net, promising to “catch” the market if it falls. Bernanke is the ultimate enabler of the relentless acceptance of greater risk for the sake of not missing out.
A Bear in Bulls Clothing
Recently, one of my very bullish hedge fund friends asked me if I was tired of fighting the Fed. My answer was “not really, just tired of fighting people who won’t fight the Fed.” In the end, they will be wrong again. My hedge fund friend is smart. He knows just how artificial this rally has been. He is a bear in bull’s clothing. My friend also believes that if a market appreciates by artificial means for too long, investors will begin to think the game is rigged. The momentum players have the advantage. They will be out before you can say “Ben Bernanke, help us.” My friend is a fast trader who understands the mysteries of high frequency trading. He is a brilliant market technician, and an expert at fundamental analysis and macroeconomics; or should I say, he was an expert. Now, he’s an expert at not fighting the Fed.
The ugly truth is, once you abandon those strategies of analysis that make investing the brilliant endeavor that it is, in favor of not fighting the Fed, you will consider everything but the Fed to be irrelevant. If analysis becomes irrelevant, investors then become just another beneficiary or victim of haphazard government policy.
What made the free market great has been risk. The elimination, or supposed elimination of risk by the Central Bank, will in fact create an inconceivable level of risk. Upon the realization that the Fed cannot control investor behavior, (one example being Japan) the declines will be monumental. To go back to the good old days of solid analysis, will be impossible due to the threat of massive Central Bank intervention always looming over a once free market. Whether the Fed “tapers” or not is irrelevant. It ‘s whether they acknowledge the limitations of this near useless Keynesian experiment. Ultimately, few investors outside of the institutional or high frequency traders, (with the fastest computers) will find much comfort in a market controlled by the whims and will of a few well-intentioned, yet grossly misguided, men and women.
Hopefully, whatever is said or not said by the Fed or its minions, involves specific mention of the severe limitations to accomplish much more that what it already has. The long term risk is far greater than the value of a few upticks in the stock market. The ultimate risk is the death of the public market. Once you lose trust and acknowledgement of investors, it will be decades before it comes back.
To see the article as it appeared in Forbes, please click here.