Less Fed, Less Bubble

The Fed open market committee meets this week and the reported odds of another quarter point bump are 74 percent.  The Tweeter-in-Chief has weighed in urging Jerome Powell to hold his horses. After all, the president does like an roaring stock market as opposed to what the market has done lately.  

Almost Daily Grant’s ran David Rosenberg’s comments from Grant’s Spring Conference where the Gluskin Sheff + Associates, Inc. man put some numbers to the Fed’s years of ease and illustrated what Austrian economists have been saying for years.  

If I took the ratios of what the stock market does benchmarked against what the economy does in nominal and real terms, this bull market and the S&P 500 would have stopped out at 1800, not 2800. The excess is central bank liquidity. The central banks added 1000 points. Not fundamentals. Central bank liquidity.

In “Making Economic Sense” Murray Rothbard provided the theory that backs Rosenberg’s analysis,

The fundamental insight of the “Austrian,” or Misesian, theory of the business cycle is that monetary inflation via loans to business causes overinvestment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real-estate prices are titles to capital goods, there tends as well to be an excessive boom in the stock and real-estate markets.

We often hear that rich are getting richer and everyone else is being left behind.  However, it is only the Austrians who point to the Fed’s policies as creating this great divide in wealth and incomes.  

Rothbard explained how inflation works in “Conceived in Liberty, vol. II”

Creation of paper or bank money ("inflation"), therefore, confers a special privilege on some groups, at the expense of the producers and at the expense of the society's money. The groups that benefit include the first issuers and receivers of the new money, those who sell to them, and generally those whose selling prices rise because of the inflation before a rise in the prices of the goods they have to buy. These groups gain by imposing losses on those to whom the new money is the last to trickle down, that is, those whose buying prices rise before the prices of the goods or services they have to sell.

Now that the Fed is trimming it’s balance sheet and taking away the punch bowl after a decade-long party, all things bubblicious; stocks, bonds, leveraged loans, crypto, real estate, art, etc are fizzling, if not, crashing.  

Grant’s reports, “Thus, while Federal Reserve bank credit has declined by 7.9% over the past 12 months using the trailing four-week average, the contraction has accelerated to a 11.1% annualized rate over the past three months.”

Less Fed, lower prices.  Plenty to go.