We put in a good citizen call to the Securities & Exchange Commission (SEC) yesterday.
“There’s a massive scheme to manipulate stock prices”, we told the friendly agent.
“I have to tell you that your call is being monitored, so that we can better serve the public”, he replied.
“Oh, don’t worry about that. The NSA taps our phone anyway”.
“Are you talking about a specific stock?”
“Oh no… I’m talking about all of them”.
“You mean, a Madoff-style scandal?”
“No… no… This is much, much bigger than the Madoff scandal. We’re talking major manipulation. Intentional. Knowledge aforethought. Pumping up all stock prices. Trillions of dollars’ worth”.
“Who is doing this?” the agent asked, a tone creeping into his voice; he was beginning to suspect he had a lunatic on the line.
“The Fed, of course”.
“Uh… thank you…”
“You gotta go after those bastards…”
“Uh… yes… we’ll look into it…”
“OK… thanks… I just thought you should know”.
New York shook the sleep from its head and rubbed its eyes yesterday morning.
Investors shrugged off the bad news from Japan and Europe. As for the bad news from the US itself, it hardly mattered. Yes, the economy was weaker than had been thought – with the worst jobs report in two years. No, there was not much good news coming from corporate earnings either. But hey, asset values no longer depend on the performance of the Main Street economy.
This is a purely manipulated market. The Dow rose over 100 points, reversing a worrying trend. Since the beginning of the year, stocks have been selling off. But on Tuesday, investors found their footings and recovered their delusions.
Yes, the Fed is on the case. Stocks are being manipulated to the upside. Willfully. Knowingly. Intentionally. Ben Bernanke can talk about tapering off. But he can’t do it.
The economy needs more support from the Fed. The Fed’s support, however, doesn’t put more money into ordinary household budgets. You can see that just by looking at jobs, wages, or consumer prices.
Bill Bonner on markets, economics & the madness of crowds
To sign-up to Bill's free daily email just enter your email address below
America’s CPI is sinking, because household credit is still shrinking and families have less money to spend. Instead, the Fed’s intervention stays in the financial economy – where its excess liquidity feeds directly into stock, bond and real estate markets.
Look at a stock chart and you identify the episodes of quantitative easing (QE), you will see that QE equals stock market gains. Liquidity drives asset prices, not the real economy.
Asset prices are jimmied and jived, in other words, by the authorities; they do not reflect the genuine ‘facts on the ground’ for business or consumers. The financial world is now dancing to a different tune; one called by the Fed.
Yesterday, we realised that stocks, bonds, and real estate have added $21trn to the nation’s balance sheets since ‘09. But at the rate the economy is adding real wealth it will take 70 years to catch up with those asset prices.
Stocks, bonds, and real estate are all counting on growth that will never happen, or at least, it won’t happen soon enough to justify such high prices.
What made stocks go up so much last year was that the Fed made a lot of liquidity available – more than $1trn, while the federal government actually used less than it had the year before. This left a lot of excess liquidity wandering around looking for a home.
What did it find? Assets.
Most likely, this will continue. Stick with me now…
1. The feds think they can manage the economy.
2. They see recessions and/or falling asset prices as problems to be fixed.
3. They think they can prevent these things with more QE. On the evidence, they’re right.
4. The GDP went up about $350bn last year; the Fed added $1.2trn. Without Fed support, the economy would probably be in recession.
5. The Fed will not tolerate recession; instead, it will continue QE to avoid it.
6. There will be no significant cut to QE in 2014.
7. And the excess liquidity that the Fed provides will continue to go into asset prices.
The economy only limps along with the help of QE. Without it, the economy slumps. The feds can’t tolerate a slump. So, they have to continue with QE.
The federal government is absorbing $400bn less credit this year than last. This leaves a lot of excess stray kittens in need of adoption. Who will take them in? Stocks. Bonds. Real estate. Yes, dear reader, we will most likely see more gains in 2014.
This is blatant manipulation of the markets. The Fed is open about it. Even proud of it.
C’mon SEC, you make the petty, two-bit manipulators pay. A few million here and there.
How about the big boys? How about a trillion-dollar conspiracy to raise stock prices?
Arrest Ben Bernanke and Janet Yellen. We want to see them do the perp walk.
• Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, enter your email address below.