Tags: Fed | money | printing | bubble

Markets Trying to Keep Faith in the Fed

By    |   Wednesday, 15 August 2012 12:39 PM

As one money manager put it last week, “if the economic data is good, then we’re in a recovery. If the data is bad, the Fed will come in and boost the market.” His point was that either option is good for the stock market.

I have to admit that, even for a guy who wrote in America’s “Bubble Economy” back in 2006 that the Federal Reserve would be printing money in order to save the economy once the bubble popped, this enormous faith in the Fed is a bit amazing.

After all, as so many people ask, “Isn’t printing money bad?” Why doesn’t Wall Street see that printing money is ultimately bad? Why don’t they see that if the Fed has to come in and pump up the stock market on an almost yearly basis with printed money that there is a fundamental problem with the market? Why are they so sure that all this money printing will prevail in the end?

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

I almost feel that the Fed could announce they will be buying stocks, instead of bonds, and the market would cheer the move even more. Wouldn’t that help the market??? The market would soar! The market would see nothing wrong with blatant stock manipulation by the Fed. It’s amazing what the market is willing to overlook now. At some point, maybe the Fed will even do it.

The market is happy to overlook bad economic reports about the United States, the continuing financial crisis in Europe and continuing declines in the European, Chinese, Japanese, Brazilian, Canadian and other world economies. In fact, is there any economy whose future looks better today than it did at the beginning of the year? Not the ones I just mentioned, that’s for sure. They are all looking worse. Yet, the market is up 11 percent from the start of the year.

This psychology of being out of touch with reality in both a short-term AND a long-term sense is important because printing money to buy bonds will only boost the market so much. What gives money printing its real punch is the psychology that believes it’s a good thing.

Why the out-of-touch-with-reality psychology? The answer is that the market is very, very scared. In a certain sense they know something is fundamentally wrong. Although they almost never talk about it (and that’s a good sign they know it’s important), growth in our gross domestic product has barely kept up with the growth in government borrowing. In fact, it’s way behind. From 2008 to 2011, GDP only increased $1.2 trillion, whereas government borrowing increased $3.8 trillion.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

What would happen to the economy if we stopped that massive borrowing or sold back all those bonds the Fed bought with printed money and take that money out of the system? If everything is so good with the economy, why is such massive stimulus needed just to keep it growing at an anemic 2 percent? Because without all that money printing and government borrowing, we would be in a massive recession and, much more importantly, we would pop the housing, stock, private-credit and consumer-spending bubbles.

Although this is rarely talked about, many on Wall Street know it at a gut level. And that’s where the enormous fear comes from. Yes, printing money will keep those fears at bay for now, but ultimately, the problem with relying on an out-of-touch-with-reality psychology for too long is that it changes.

It’s easy to stay out of touch for a short time, it’s impossible for a long time. That’s why the death of all bubbles is time. At some point, it becomes really obvious to a number of people that what I am saying is true and that the fundamentals supporting the market are not good. The reality is that money printing is not good, and more money printing will eventually scare the market, not make it feel better.

It only takes a small percentage of the market to change in order to force the market down. When that psychology changes, the declining market will quickly raise the fears of others in the market who had been suppressing those fears. All this could happen rather quickly once it starts. Until then, the market will try desperately hard to keep its faith in the Fed.

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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Wednesday, 15 August 2012 12:39 PM
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