Tags: Wiedemer | bubble | QE | stable

The Stock Market Is Everything

By Robert Wiedemer   |   Thursday, 20 Sep 2012 09:45 AM

With the recent decision to do an open-ended round of money printing, a continuous third round of quantitative easing (QE3), or QEternity as some people are calling it, the Federal Reserve has made it very clear that it will do whatever it takes to keep pumping up the stock market. However, its impact on the job market and the housing market will be minimal. Many, many economists agree on that issue.

But its impact on the stock market has been quite significant, as was QE1 and QE2. So, despite what the Fed says, this is all about the stock market and not about jobs or housing.

And that actually makes a lot of sense. Nothing is more important to our economic and financial stability right now than a stable or growing stock market. It is the primary bubble now, just as housing was the primary bubble in 2005. Unemployment could go up 1 percent and it really wouldn’t matter that much to our economy. Housing prices could go down a bit more and that wouldn’t matter much either. By the same token slow increases in either wouldn’t matter much to our economy either.

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However, the stock market is much more fragile than our economy is. If it starts to have a significant decline, that could easily snowball into a much larger decline. And a decline of 20 percent to 30 percent would be a small disaster for our economy. Consumer spending would slow dramatically, since it is so heavily driven by the top 20 percent of income earners, who own stocks. Housing would slow down dramatically as well. Investment would slow and it would send financial shocks around the world. And that’s a big problem since the rest of the world’s economy is unstable as well.

From a longer-term perspective, the same situation holds true. Median family income has fallen back to 1995 levels, but it’s not an economic disaster. However, take the stock market back to 1995 levels and that WOULD be a disaster for the economy. As a reminder, the Dow Jones Industrial Average was at 3,817 in January 1995.

In a bubble economy, it’s the bubbles that matter, not the fundamentals. And the key bubble right now is the stock market. The Fed knows that and is doing everything it can to keep it up.

That stock market bubble is also the key to keeping up the housing bubble. Let that stock market bubble pop and the housing market is sure to follow. Imagine if home prices fell to 1995 levels. To put some numbers on that, the Federal Housing Finance Agency housing index is 311 now, but was 182 in 1995. A near 50 percent decline in housing prices would be devastating. Nothing will do more at this point to keep that housing bubble from popping than a stable stock market. Just as the rising bubbles of the 2001-06 bubble economy worked interactively to boost each other up, they do the same today.

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That the Fed would take such dramatic action as an open-ended commitment to print at least $40 billion a month, and more if needed, for as long as needed indicates the desperation the Fed is feeling. It has to keep up the stock market bubble or housing and consumer spending will fall dramatically. The stock market is everything. If it falls dramatically, the economy would quickly be in serious trouble. And without that printed money, it would fall — a lot.

The idea of an exit strategy (a plan for taking the money out of the system), which was talked about after QE1, has been completely dropped. Instead, just as I had predicted earlier, we printed even more money, not reduced it. And I make the same prediction today; we will print even more money in the future. A lot of printed money will be desperately needed to stabilize increasingly unstable U.S. and world financial systems.

Will all this money printing work? In the short term, yes. In the long term, of course not. We are just propping up one set of bubbles with another bubble. But we will do it nonetheless because at each point when we make the decision to print, we will feel we have no choice because the short-term alternative is so miserable.

That people cheer this money printing is sort of amazing to me, but quite understandable. Yet, people in the future will stand in utter amazement that rational and intelligent financial investors ever cheered what we are doing today.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media.Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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With the recent decision to do an open-ended round of money printing, a continuous third round of quantitative easing (QE3), or QEternity as some people are calling it, the Federal Reserve has made it very clear that it will do whatever it takes to keep pumping up the stock market.
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