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The Federal Reserve’s Stock-Market Supernova

By The Conmunity - Pop Culture Geek from Los Angeles, CA, USA [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

During the first several years of the Fed’s “recovery” program, bankers denied that banks were the primary drivers of the stock market bull. Then, a little over a year ago, the Fed’s Richard Fisher confessed what everyone in the alternative financial media already knew — the nation’s central bank was “front-running the stock market” in order to “create a wealth effect.”

It was more of a “special effect” really because it was all show with no deeper economic reality to back it. When the special effect machine turns off, the show is over. What the Fed’s machine did was create over 14 trillion dollars of new money and pump it entirely into stocks and bond.

You would think that would make it clear to everyone why stocks and bonds have simultaneously enjoyed history’s greatest bull run. (But somehow it doesn’t.) How could stocks and bonds do anything but go up with years of money creation being pumped directly into their arteries? That, of course, is exactly why it used to be illegal for banks to invest in stocks. Being the creators of infinite money supply, the Fed can completely (and legally since the Clinton days) rig stock markets, for which the Fed’s euphemism was “wealth effect.”

Wealth Effect Theory seems to follow the same line of reasoning as trickle-down economics. It follows a dictum that says “growth in stock value,” no matter how you fuel it, will cause capital investment, such as the creation of new factories. That, in turn will create high-paying, good-benefit jobs.

This, of course, has been utter nonsense that was rightly described by George H.W. Bush as Voodoo Economic before he became a Reagan convert. Nobody ever built a factory in order to create products where there is no demand, and how can demand go up when the only ones getting all the new money are a small number of investors, while the masses who could create enormous demand haven’t a penny extra to spend? It makes no sense.

The reason that both Wealth Effect Theory and Trickle-Down theory are complete fallacies is that no one ever works for money if they they can just go out and pick it off a tree via a bank-guaranteed gamble in Casino Wall Street. Instead of productive, job-creating, capital investment, all you get is new money chasing after the last round of new money in full knowledge that another new round of new money is coming. Another name for that is a “Ponzi scheme.”

So, whether it is capital-gains tax cuts, or just new money created by a clerk’s fingertips on the keyboard of some computer deep in the shuddered heart of the Fed’s Eccles Building, easy money pursues easy gains. Stocks go up, but earnings do not. Investors get rich, but laborers do not. All the same, laborers have continued slobbering like Pavlov’s dogs as the mere sound of the stock market bell, hoping that another explosion in stock prices due to another round of trickle-down tax cuts will someday drop a few trinkets into their hands, too.

Fake money and free tax breaks targeted for speculators send all of that up so easily, but that means it all comes down with equal ease.


How does a supernova unwind?


Last month, another Fed Fisher (one named Stanley) announced the Fed would start to gradually bleed off the trillions of dollars it has amassed on its asset sheet, effectively sucking some of that easy money back out of the economy. It might be smart to ask what happens when the banker’s guarantee on stock and bond purchases goes away while the underlying economy has never risen to match the wealth effect?

A rational person would say that it is impossible for stock prices to remain inflated when the easy money supply that inflated them deflates into an otherwise empty economy — empty of the high-paying labor positions that were once the hallmark of America, empty of corporate earnings (at least, that have any correlation to the high stock prices), empty of all new demand potential due to a middle class that is thinning faster than Ben Bernanke’s hair.

That’s why, to me, deflation of the stock market in a year when the Fed is promising to raise the price of money and hinting that it may start deflate its existing assets by the end of the year leads to the conclusion that the stock market is coming back down. What the Fed is saying is that it will be sucking the blood back out of the bull.

Of course, the Fed don’t know that because they believe in the fantasy that simply inflating stocks creates a viable and enriched economy that will prove to be self-sustaining. They believe that money is the basis for an economy. Actually, they believe that debt is the basis for an enriched economy because their money is created by buying up bonds. (Banks buy the government’s debt in the form of government bonds, and then the Fed creates money out of thin air to “pay” to banks in exchange for those government bonds. The Fed winds up holding the federal debt, and the banks wind up holding the new money, which they invest in either more government or corporate bonds or in stocks.)

Don’t ever tell this cabal of banksters that they are simply monetizing the US government debt, though, because that’s illegal; and they believe they are not because the Fed’s member banks bought the bonds from the government, while the Fed, which the banks wholly own (for a fact), merely bought them back. (To believe that the Fed was not the original buyers of US debt, however, you have to close your eyes  to the fact that, before the banks bought a single bond, the Fed telegraphed a guarantee to them that it would immediately buy all of those bonds …. a day later with newly created money. It told the banks, “If you buy the government’s debt, we’ll print money and immediately buy it all back from you.” I think that is called “purchasing by proxy.”)

That’s the charade that the Fed has been promising it would unwind during each of the last three years, managing only three minuscule interest increases during that time, the last of which it sneaked through during an obvious period of irrational exuberance in the stock market, which we called the “Trump Rally.” Peak irrationality meant stocks would continue to rise in the face of an interest increase because all fundamentals are ignored by irrational market. It also meant that bond interest was already rising well ahead of the Fed’s interest target, meaning the Fed’s interest was inconsequential catch-up to what the market was already down on its own.


The Fed’s irrationally overinflated stock market exhibits key omen of previous major crashes


Most sage investment advisors will tell you that stock markets do not crash “bigly,” to use a Trumpism, until you find them ramping up quickly in a purely emotional drive of irrational buying.

If you don’t think the present market is irrationally exuberant, let me point your eyes back to the days before the dot-com crash when people started worrying (just before the market fell) that investors were paying an awful lot for stocks in companies that had, for years, not made a dime. Most had seen nothing but endless losses, but they were being bought on hope.

Flash forward to this week when an automobile manufacturer that has never done anything but lose money since it began just became the most valuable automobile manufacturer in America (based on its stock). Tesla, which is being priced as a high-tech company, just ousted General Motors, having screamed past Ford only a week ago to now become the United State’s top car manufacturer.


  • Never mind that GM and Ford have experience building cars and generally making very good profits for about a hundred years.
  • Never mind that GM and Ford are icon companies in America.
  • Never mind that GM and Ford own vastly greater amounts of capital assets.
  • Never mind that GM already beat Tesla onto the market with an all-electric electric vehicle that is capable of driving farther than your neighbor’s house on a single charge.
  • Never mind that GM is expected to earn about 9 billion in profit this year.
  • Never mind that Ford is expected to earn a little over 6 billion.
  • Never mind that ALL of that profit — real muscle — could be applied toward developing better electric vehicles.
  • Never mind that Tesla, once again, is expected to lose about a billion.
  • Never mind that Tesla had only the capacity to make fewer than 80,000 vehicles globally last year, while GM had the capacity to make more than 10 million.


In spite of all of that, the stock exchange says that Tesla is worth more!

I don’t expect GM or Ford will actually make the profit this year they are claiming they will, but they do have a history of making lots of money; so, they have a better shot at it than Tesla with its guaranteed losses.

Yet, Tesla is the investment of choice — this year’s Cadillac of stocks:


“Tesla engenders optimism, freedom, defiance, and a host of other emotions that, in our view, other companies cannot replicate,” said Alexander Potter, an analyst at Piper Jaffray Cos.


Does that not sound like a stock evaluation by an investment analyst that is pure emotion? “Tesla feels good. Buy it!”


“The market cares more about the potential new market value of the other businesses Tesla is in than about real profits and cash flow,” said David Whiston, an analyst at Morningstar Inc. “Right now there is nothing to slow Tesla’s momentum. They could pass Honda, too.”


Sounds like the dot-com bubble to me.

Money chasing money, right? Money chasing whatever stock values are going to do, not chasing whatever companies are most likely to actually ever turn a profit? Money running to do what it believes all the other speculators are going to do with their money.

And that is the kind of stupid stuff that happens when money is cheap or free and given to major banks to invest at will. But stupid falls the same way it climbs.





[Tesla Roadster photo by The Conmunity – Pop Culture Geek from Los Angeles, CA, USA [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons]
  • cdndmf

    Great article as always, Dave. The “clue” of stocks and bonds being on a record-bull run in tandem, during a period of obvious financial stagnation for practically every working person in America, is a glaring omission reminiscent of articles I remember reading in 2007 titled, “Why the Housing Market Can Still Go Up from Here”. However, I do not agree with the characterization of Tesla’s stock price as entirely a symptom of a bubble created by fed funny-money. In the first place, we are talking about “only” a $51-billion valuation. As you state, the Fed game involves TRILLIONS of dollars; this money has found its way into much more than just Tesla. As for Tesla, it is a mis-characterization to say it “lost” a billion dollars last year. Tesla presently makes money on every unit that it sells – more than many other auto-makers – but these profits aren’t being distributed back to investors; they’re being invested in Tesla’s future production capacity (one of the few companies out there not dedicating all their available capital to inflating their stock price) . The ‘Gigafactory’ is the keystone to Tesla’s plans for building affordable electric vehicles, as it will reduce the per-unit cost of batteries, the biggest expense in electric vehicles; but the ongoing start-up costs for getting the factory built and running is $5 billion. Tesla is arguably over-valued, but not by orders-of-magnitude. It will probably dip, but it probably won’t crash (unless the whole world is crashing with it). Even then, Tesla’s fate rests on whether or not customers will buy the vehicles they are intending to build. To that end, I would submit the 400,000 Model 3 pre-orders speak for themselves. (Full-disclosure: I do not own Tesla stock; I’m just confused by all the negativity Americans hurl in the direction of this true American success story: A cutting-edge, high-tech, paradigm-shifting product designed and manufactured here in the United States – one that will TRULY get us off of foreign oil)

    • Oh, I wasn’t suggesting for a second that Tesla was the only stock pumped up by the Fed’s money printing. All stocks are pumped up. But the fact that Tesla has become worth more on the market than GM or Ford is absurd.

      While Tesla is not making money because it is investing in its future, that’s kind of the problem for Tesla. Ford and GM already have massive production facilities all over the world that turn out millions of more automobiles than Tesla can create. So, Tesla will have to invest in its future production for decades before it even catches up to the production capacity of either of those companies, which begs one to question why Tesla, with its comparatively minuscule production capabilities (and therefore comparatively minuscule profit capabilities anytime in the near future) should be worth more than General Motors or Ford.

      That’s where the absurdity comes in. If Tesla had a great year, it couldn’t match a mediocre year by the other companies; yet this upstart has already achieved higher value than the other companies have managed to earn after decades of expansion.

      I’m not saying Tesla isn’t a great success story. It is, but it is an infant company compared to these other two huge American success stories, so it is not realistically worth anything near what they are. The value has been exaggerated in that Tesla’s production capacity is so tiny compared to these others that it still has a long distance to go just to catch up to what they are capable of (in good years). That means it will not be returning profit to investors for years if it intends to catch up to the GM and Ford; but the success story is not exaggerated. The idea that any company can come from nowhere into the picture and begin to make headway against these two established behemoths, is extraordinary, and their cars are beautiful.


  • Chris P

    We can see the smoke but still there is no fire to be seen. There are so many bubbles out there but will this year pan out any different or will the Fed keep pumping it up? I want one day to get on here and type in it has started. Good read Dave. Thanks

  • Jayme Martins de Sequeira

    You guys should read about Eike Batista, he was a billionaire in Brazil that lost everything and is now arrested. He was the government’s pet, got a lot of federal money through a public bank BNDS. When he was on top he had mining companies, gas companies, oil companies, hotels and more among his assets. The guy had IPO for some of his companies in the Brazilians stock exchange, many people fell for the syren’s chant. His companies were worth 30 even 60 real (10-20 dollars). When time came for pumping real oil out of the sea, the house of cards fell, most his companies are bankrupt and guess what happened to the people that bought the top. Auto loan is about to crash

    • That’s exactly how it works. They’re on top and looking like big shots to the whole world … until the day it goes down. And when it does go down, it is often other suckers who take the ride to the bottom.

      You’re right about auto loans, too, and with them the auto industry, which is why I said I don’t believe the profits they claim they are going to make — not now. Just before the last crash, I was asking people what on the earth the auto industry’s end game was going to be. They had sold everyone on cars with practically free financing. All that does is borrow business forward from the next year, so what were they going to do but crash when the next year came. Deja vu.