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Imagine your doctor put you on a daily dose of oxycontin, phenobarbital and Quaaludes for six years straight. Then he suddenly cancelled your prescription.

Do you think your behavior might become a bit erratic?

This is what’s going on with the stock market. It’s trying to shake off six years of overmedication brought on by the Fed’s zero rates and liquidity injections.

Let me explain: Until recently, stocks had been on a tear that pushed valuations into the stratosphere. Volatility stayed low because Bernanke’s easy money and QE made investors more placid, serene and mellow. They ventured further out on the risk curve and took more chances because they were convinced that the Fed “had their back” and that there was nothing to worry about.

Then things began to fall apart. The Fed ended its asset purchase program and started talking about “normalization”, an opaque term the Fed uses to avoid the harsher sounding “rate hikes.” This is what began to rouse investors from their drug-induced trance. The era of cheap money was coming to an end. The punch bowl was being taken away.

Then– just as the Fed’s surging liquidity had calmed the markets for six years– the absence of liquidity and high-frequency trading sent stocks gyrating wildly for months on end. The markets became unpredictable, convulsive, topsy-turvy. And while rates remained fixed at zero throughout, the mere anticipation of higher rates was enough to ignite a sustained period of extreme volatility unlike anything traders had ever seen before. By taking its foot off the gas pedal and trying to restore traditional market dynamics, the Fed had slammed the vehicle into reverse unleashing pandemonium across global markets.

Naturally, the pundits tried to blame the mayhem on China or emerging markets or droopy commodities prices or even deflation. But it’s all baloney. The source of the problem is the Fed’s easy money policies, that’s what created the disconnect between valuations and fundamentals, that’s what sent stock prices to the moon, and that’s what inflated this ginormous stock-and-bond bubble that is just now beginning to unwind. China might have been the trigger, but it’s certainly not the cause.

Last Thursday, the unthinkable finally happened: The FOMC issued a statement that the interest rates would not be raised after all, but that ultra-accommodative policies would remain in place for the foreseeable future. On similar occasions, the markets have always rallied in gratitude for more-of-the-same easing. But not this time. This time, the Dow Jones surged 100 points before cratering 299 into the next session.

“Ah, the Fed has lost its magic touch”, the analysts opined. The promise of zero rates was no longer enough to push stocks higher. What does this mean? If the Fed does not have supernatural powers, then who will keep the markets from plunging? Who will keep the bubble intact? Who will save us from a painful correction?

Nobody knows.

What we do know is that stocks are currently rising on the back of cheap credit that is being diverted into Mergers and Acquisitions (M&A) and stock buybacks. Corporate debt continues to grow even while earnings and revenues shrink. In other words, the Fed’s perverse incentives (zero rates) have seduced corporations into piling on record debt for financial engineering and asset stripping, while investment in building up their companies for future growth (Capex) has fallen to post war lows. That’s the kind of shenanigans that’s driving the markets.

Corporations have been riding the crest for the last three years, refinancing more than $1 trillion per year from 2012 to 2015. But tighter credit conditions and mounting debt servicing is expected to curb their appetite for more borrowing dampening the prospects for higher stock prices. The same rule applies to stock buybacks. When equities prices flatten out or drift lower, and debt gets more pricey, share repurchases no longer make sense. So, you can see that –even if rates stay low– tighter credit and extra debt servicing is going to pull the rug out from under the market and put stocks into a deep freeze.

The point is, the Fed knows what’s going on but just looks the other way. They know their easy money isn’t building a strong, sustainable recovery. They know it’s being used to beef up leverage on risky bets so dodgy speculators can make a killing. They know it all, but they don’t give a rip. They just want to keep the game going a little bit longer, that’s all that matters to them. Heck, maybe Yellen has convinced herself that she can pull a rabbit out of her hat at the last minute and save us all from disaster? It’s possible, but I doubt it. I think she knows we’re goners. The economy is soft, the markets are zig-zagging wildly, and the whole bloody contraption looks like its ready to blow. She must know that the game is just about over.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
 
• Category: Economics • Tags: Federal Reserve, Wall Street 
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  1. anonymous • Disclaimer says:

    The Fed intends to postpone the inevitable hard landing until just before the 2016 election. Like last time, the chaos will allow bank bailouts to be rammed through both the outgoing and incoming Congress.

  2. tom says:

    Competitive international agencies that the BRICKS has started, as well as the dollar being traded less internationally in large part because of low interest rates, means that the Fed sees that the US Empire has to start to take more precedence, over US corporate greed.

    This is a play in favour the Empire, At a small expense of US corporate elite’s.

  3. Elites says:

    Markets Gone Mad?
    Try Socialism Comes Home.

    • Replies: @Leftist conservative
  4. When the debt owed is not paid back by major borrowers, the Fed Res is probably expecting the taxpayer to finance a bailout.

    At least, that is how democrats do it.

    Obimbo has already demonstrated his lust for Wall Street crony capitalism.

    There should be a law that does not allow a broker to sell an equity for more than its book value. Such a law would chill the ridiculous speculation going on and encourage more investment in production infrastructure.

    • Replies: @Greg Bacon
  5. Leftist conservative [AKA "radical_centrist"] says: • Website
    @Elites

    Markets Gone Mad?
    Try Socialism Comes Home.

    yup…america is socialism…cuz socialism is all about supporting big business instead of the people and helping the rich get richer.

    What the…?

    Are you a machine? A software program, maybe?

    • Replies: @Wally
  6. @Joe Franklin

    “At least, that is how democrats do it.”

    Dems or Repubs, doesn’t matter, there’s only ONE party in the USA, the ‘Wars for Wall Street and Israel’ party.

    As for the Fed, like Max Keiser has said, you can’t taper a Ponzi scheme, like the FED giving trillions in basically free money to Wall Street, which was a massive wealth transfer from the middle class to the 1% and they took the money and ran… to more mansions, bigger private jets, more Bentleys and Rolls-Royce’s and paying close to 200 million for a painting.

    That noise you hear is the air escaping from the overblown stock bubble.

    “Look out below”

    • Replies: @Joe Franklin
  7. I’m old enough to remember the ’60s when this crap started with Paul Samuelson and JFK. The Dems called “taking away the punchbowl” “economic sadism” and touted the glorious future of 2% deficits with 2% inflation as far as the eye could see.

    By the time ’71 came and the Republicans turn Nixon choked and closed the gold window instead of defending the dollar. Defending the dollar would have caused one hell of a recession and resulted in no Republican elected President for at least 50 years, but would have stopped the bleeding. Then came the Humphrey-Hawkins Act and our doom was sealed because the Pols told us “we’re all Keynesians now”. Reagan and Clinton were just icing on the cake as we enjoyed the accelerating ride towards the waterfalls.

    I recount all this because it’s pretty aggravating to hear all the complaints now that it is time to pay the piper for the fun that was had while the country was “growing”. There were plenty of prophets telling this nation where we were headed but precious few who listened.

    Woe unto you, scribes and Pharisees, hypocrites! because ye build the tombs of the prophets, and garnish the sepulchres of the righteous, 30And say, If we had been in the days of our fathers, we would not have been partakers with them in the blood of the prophets. 31Wherefore ye be witnesses unto yourselves, that ye are the children of them which killed the prophets. 32Fill ye up then the measure of your fathers. 33Ye serpents, ye generation of vipers, how can ye escape the damnation of hell?

    We live in interesting times.

  8. @Greg Bacon

    First off, there is a slight difference between the R’s and the D’s.

    The R’s espouse conservative Judaism and the D’s espouse secular Judaism.

    What you don’t recognize as being the one-party in the US, and in Israel by the way, is the victim cult party which controls the outcome of all national elections.

    Victim cult people comprise more than 80% of all voters in the US and Israel.

    The Fed and its member banks do not give money away for free, it charges some interest for borrowed money.

    Fed approved cheap money for borrowing is not criminal. It might be stupid, but it is not immoral. Also, cheap Fed money is more typically a Democrat stimulus tactic, versus a typical Republican stimulus tactic of giving tax breaks.

    What is criminal is when the federal government gives taxpayer bailout money to Wall Street listed businesses and investment houses.

    Again, giving taxpayer money to Wall Street is mostly a Democrat tactic, as demonstrated by Clinton and Obama. Republicans instead give out tax breaks.

    Yes, most equities are grossly overpriced, some stocks more than 4 times their book value.

    These overpriced equities are supported by cheap-to-borrow money from the Fed, not free money from the Fed or tax breaks.

  9. Wally says: • Website
    @Leftist conservative

    “… cuz socialism is all about supporting big business instead of the people and helping the rich get richer.”

    In fact that is correct. Do you think there was no elitist rich in the USSR, PRC, Cuba, N. Korea, etc.?

    Do you really think that all the factories in the USSR were built by the communists? No, there were arrangements made with the former business owners. The communists needed them.

    All Marxist states ultimately “supported” / controlled big businesses for the benefit of those participating in the game.

    “The people”? Since when has communism ever cared about the people?

    You are one naive sucker.

  10. MarkinLA says:
    @Joe Franklin

    What do you call it when the fed buys worthless mortgages from banks at face value?

    • Replies: @Joe Franklin
  11. Jmaie says:

    I see Mr. Whitney reads zerohedge…

  12. @MarkinLA

    What do you call it when the fed buys worthless mortgages from banks at face value?

    That is crony capitalism.

    The Fed and its member banks gave away subprime mortgage loans under pressure from the Democrats.

    In return the Fed and its member banks got some assurance from Democrats of a taxpayer bailout when the loans went Tango Uniform.

    Anytime there is taxpayer money gifted to private businesses it is crony capitalism.

    Tax breaks are not generally crony capitalism, unless they are highly selective to whom they benefit.

  13. unit472 says:

    The numbers would say the Fed can’t ‘normalize’ interest rates. In 2015 the US government spent $381 billion on interest payments to holders of US government debt. That is almost exactly what the US government paid in interest in 2000 on a debt mountain only 1/3 as big as todays. Just a 50% rise in interest rates, say a 10 year US government bond yielding 3.25%, still a low rate by historical standards, would require the US government to find an additional $190 billion per year to service the debt assuming we had a balanced budget which we certainly do not.

    The other great danger is that with stocks and bonds at peak valuations the downside risks cause a rush to the exits and more and more money is held as economically inert cash. The Fed can only stop this by imposing a penalty on holding cash and that means negative interest rates as Europe has begun to implement.

    • Replies: @MarkinLA
  14. Wally says: • Website

    The fact remains that the leadership of the Fed has been utterly dominated by Jews. Go ahead and fact check it.
    Just a coincidence no doubt.

    And they resist any and all attempts to audit their transactions.

    Generally thinking is that they have rigged the game in favor of supremacist Jews, dumped billions into the hands apartheid ‘Israel’.

    Why else would Jews that run the Fed resist an independent audit?

  15. MarkinLA says:
    @Joe Franklin

    The Fed and its member banks gave away subprime mortgage loans under pressure from the Democrats.

    Please stop with the Republican good / Democrat bad nonsense already. Nobody forced Wall Street to buy those crappy loans. Wall Street buying them is why those unregulated mortgage companies (nothing to do with the fed or banks or the CRA) who advertised like crazy made so many of them. Everybody was making money hand over fist until it all ended. Nobody needed to force anybody.

  16. joe webb says:

    “They [the Fed] know it’s being used to beef up leverage on risky bets so dodgy speculators can make a killing. They know it all, but they don’t give a rip. They just want to keep the game going a little bit longer, that’s all that matters to them.”

    This is nonsense. Anyone who thinks seriously about economics and politics knows this is nonsense. The Fed and the Financial class is not interested in ‘a bit longer.’

    Neither is any other sector of the ruling class. What are they going to do…just fly away from the ruins?

    Rationally, the financial class is more like it is holding a tiger by the tail and does not know what to do.

    The history of the stock market over the last 75 years or so (as I recall) includes a price earnings ratio of 17 to one. Now it is up to about 27 to one, which is unsustainable from an historical vantage.

    O why don’t the lefties like Whitney listen to me (?), woe is me. You might think that they would venture some fundamental analysis on the Capital to Wages ratio which is key to a robust capitalist economy and which the pigs who run our economy know is out of whack but they don’t know how to fix it.

    Maybe the Whitneys, leftist if not communist central planners of the old dead-hand socialists/communists variety, want another go at communism. They root for the ‘collapse’ but , again, do not tell us readers that there is a simple (technical) solution: rebalancing the Capital and Wages equation. The fundamental problem is that working and middle class people are not paid enough to purchase what they produce. Hence, the ailing consumer spending factor which drives any economy.

    The second most important corollary is that a world market situation allows the capitalists to forget about their “own” country and people and externalize the problem of low consumer demand by going international…to hell with their own consumer national base, we will sell to people who do have some money to spend.

    There are other corollaries, like feeding useless people on welfare (the race factor), immigration of cheap labor, and the social effects of the above…Robert Putnam’s discovery of Eroding Social Trust due to racial diversity, etc.

    I have never seen Whitney or the other leftie guy talk about any of this. They must luv the Darkies, or are willing to kill Capitalism By Any Means Necessary, and thus open the gates to the unwashed wretched of the Earth…anything to kill Capitalism, and like Lenin, open the veins of White people.
    Russia’s 1917 was in largest part a war against Russians and Russia’s Germans, by you know who.

    Joe Webb

    • Replies: @Wally
    , @Kyle McKenna
  17. MarkinLA says:
    @unit472

    more money is held as economically inert cash

    There is nothing more economically inert than people trading old stock back and forth between each other. When the banks have it, it at least can be loaned out to do something useful. The problem is there is nothing useful to loan it out to. The world is awash in cash. Anybody with a decent idea and business plan can probably get financing. We don’t need any more real estate developments. Much of the advancement in technology is about tinkering around the edges, there are no real breakthroughs that will employ millions like the PC and semiconductor industries did in the 80s and 90s.

  18. Bill says:
    @Joe Franklin

    Again, giving taxpayer money to Wall Street is mostly a Democrat tactic,

    Alan Greenspan: liberal Democrat
    Ben Bernanke: liberal Democrat
    George W Bush: liberal Democrat

  19. Bill says:
    @Joe Franklin

    The Fed and its member banks gave away subprime mortgage loans under pressure from the Democrats.

    Yeah, the “ownership society” was not a major rhetorical and policy thrust of the GOP during W’s tenure. That was all a dream.

  20. @Joe Franklin

    The Fed and its member banks do not give money away for free, it charges some interest for borrowed money.

    The member banks definitely don’t give anything away for free, but for the past 7 years, the Fed sure has. It’s called Zero Interest Rate Policy (ZIRP) and it’s been around since 2008.

    Also, cheap Fed money is more typically a Democrat stimulus tactic, versus a typical Republican stimulus tactic of giving tax breaks.

    Neither party can directly control the Fed. Looks at this chart (and click the ‘MAX’ button) to view Fed funds rates since the early 70’s: http://www.tradingeconomics.com/united-states/interest-rate

    There’s no relationship between D’s and R’s and how high rates are. None.

    • Replies: @MarkinLA
  21. @Joe Franklin

    The Fed and its member banks gave away subprime mortgage loans under pressure from the Democrats.

    The Fed doesn’t make any kind of mortgage loans, subprime or otherwise. As for the member banks–what are you talking about? The famous ‘CRA Theory’ maybe? The idea that a law passed in 1977 caused a massive real-estate bubble twenty years after the fact? Sure! And the creation of mortgage-backed securities in the mid-90s had nothing to do with it either–I’ll bet!

    But that’s OK. Just keep making excuses for the Republicans and they’ll be sure and return the favor by duping you over and over.

  22. The article and comments all seem to miss one overwhelmingly important point.

    It is the legislature under the influence of half baked half understood Austrian school ideas that has spent years denying America the restoration and extension of needed infrastructure paid for with almost interest free loans that has been the problem. Also

    The Fed has a dual mandate (not just sound money without significant inflation like other CBs) and has very few tools to deploy in its necessary efforts to make up for government (and market) failure.

  23. Wally says: • Website
    @joe webb

    Well said, Sir.

    ‘Profits are high, wages are down.’

    Of course, the flood of unwanted immigrants will necessarily increase the labor pool, hence drive down wages.

    Something so simple that even a Marxist could figure it out.

    And who is it that demands massive immigration into the US & Europe, yet prevent any non-Jew immigration into “that shitty little country”?

    Who is that demands gay marriage for the US & Europe, but bans it in “that shitty little country”?

  24. MarkinLA says:
    @Seamus Padraig

    You forgot that the reserves the banks are required to keep with the fed now draw interest where in the past that was dead money to them. What a sweet deal borrow at 0% and get interest on your deposits. If that isn’t giving money away what is?

  25. @Wally

    You ignore the fact that immigration is wide open to that “shitty little country”. So what that it takes a bit of time. All you have to do is the equivalent of what many Spanish Jews did in Castile and Aragon in the 15th century. You find a suitable Orthodox rabbi (preferably one with money troubles), you bone up on Judaic belief, and you convert. What’s not to like? After all famously welcoming countries like Australia demand that you speak the national language before becoming a citizen – unlike Israel – and to immigrate you at least have to prove you have some useful skill which no longer includes hairdressing….

    Ah, but you are a Christian?!? So why are you hardening your heart against all those poor people from Latin America who have been breeding as the Pope, Evangelicals and Ayatollahs would approve and just want to sell their services for what rich old Uncle Sam’s market will pay?

    • Replies: @Big Bill
  26. @Wally

    I would go further and ask whether you really think all those former Soviet citizens whose influence on the tone of Israeli life and politics is so marked (unfortunately many would think) should count as Jews? True, they will count as virulent Israeli nationalists in many cases. But I don’t think you or most commenters mind nationalism. Perhaps you are one whose beef is that the US can’t be nationalist like many, maybe most, other countries and you blame Jews for powering up the anti-nationalist force of ideas.

  27. rod1963 says:
    @Wally

    It’s called neoliberalism popularized by Milton Friedman and embraced by a majority of the super wealthy in the world.

    They get together at Davos every year to discuss how to screw people over and loot countries.

    This is why the support for open borders is near unanimous among the super rich. It’s a money maker. It’s not just a Jewish thing anymore. Almost any card carrying member of the global elite supports it along with the intellectual class as well.

    These are the same people who promote “Free trade” between unequal nations and the poorer one gets a** r*ped. Free trade is a form of colonialism without the military and foreign governors. Instead they are replaced by locals and the native politicians bought off. It’s all very slick, we don’t see it’s just a variation of the slave master and his slaves because it’s happening 6000 miles away and the corporate controlled news media censors all this.

    This is why political parties are a sham today as well. These people own both sides of the coin. In terms of policies they all support the same things. More Free Trade, globalization, de-industrialization of the West, destruction of traditional cultures and values, etc. That’s right there is no difference between Hillary, Jeb, Rubio or Carly on the important issues. Of course these issues were given to them by the oligarchs who own them.

    They want people weak, divided and dumb. It makes them easier to exploit and control.

    Looting isn’t just for Jews anymore not that it ever was. Just ask the Romans.

  28. @joe webb

    The history of the stock market over the last 75 years or so (as I recall) includes a price earnings ratio of 17 to one. Now it is up to about 27 to one, which is unsustainable from an historical vantage.

    It’s nowhere near 27:1, at least not the S&P500 which is the broadest popular index. Here’s Morningstar today:

    The S&P 500 sits at 1,958 as of this writing. This implies a price/earnings ratio of 18.5 using trailing 12-month operating earnings, 24.8 using a 10-year average of inflation-adjusted earnings (the Shiller P/E), or 17.1 using trailing peak operating earnings. Those measures have been lower 59%, 53%, and 61% of the time since 1989, respectively.

    And the Shiller P/E is the one widely acknowledged to be most in need of revision. I also disagree that the Ruling Class has as long an investment horizon as you contend, but I admit I stopped reading somewhere along there..

  29. joe webb says:
    @Wally

    thanks Kyle. I was just reporting what i read in WSJ last week. Maybe someone else can explain this thing. maybe it was based on the DOW. Joe

  30. joe webb says:
    @Wally

    thanks Wally, and I repeat, why don’t these lefties respond to my criticism/critique?

    I have talked to a banker who has been around forever. He agrees, and also agrees that the overseas cheap labor/slaves are damaging us, especially the working class, shall we say, whites.

    Globalism totally changes the economic rules. Those rules benefit Capital and not Labor.
    Once upon a time, Jews were lefties of the economist type, besides the Leninist type. Now Jews are allied with Capital since the Jewish Power has succeeded in making it.

    In the first instance, Jewish communists waged war against Whites in Russia, etc. And now they wage wage war again against Whites, but are allied with Capital not Labor.

    People , including myself, used to wonder what explains the jewish role in being capitalists, and, at least used to be…in being communists or socialists. Silly boy was I aamidst plenty of other dumb whites. Jews work for Jews and nobody else.

    Whites are the only race that works for other races, including the jewish race. The chinks are going to outdo the jews, but at least where I live in Silicon Valley, the chinks are pretty much recognized as “rapacious” per a liberal gal I know. Even the liberals can get this one, even if they are slow learners with regard to jews.
    Joe Webb

  31. Big Bill says:
    @Wizard of Oz

    Things are getting sticky on the conversion front. As the Haredi win the demographic war in Israel they are given more and more control over the “who’s a Jew” question. They have been rejecting conversions certified by rabbis they deem to be religiously questionable. They have also been dragging their heels for years in converting Russian immigrants. And they have even been challenging people who have lived their whole lives as Jews and have been generally accepted as Jews but cannot produce a clear paper train (e.g. their breeding papers were destroyed in WWII).

    You may be able to MOVE there under the Law of Return with generic conversion papers, but you may find yourself cut off from full Jewish participation in the culture and society. And I don’t think they have any silly “family reunification” policy that would let you chain migrate any goy relations after you like Europe and the Anglosphere have.

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