Every time US stock markets weaken on a day-to-day basis, the US Federal Reserve now jumps in to support them, as the chart above shows:
- We saw this first on October 16, when the S&P 500 fell 5% in a week to 1862. In jumped Fed Governor James Bullard to calm market nerves by suggesting that the Fed should delay ending its Quantitative Easing programme
- Then we saw it again last week, when the S&P fell 4% in a week to 1972. This time, the Fed itself decided to calm nerves by backtracking on its earlier forecast that it could increase interest rates sooner rather than later
Commentary from the Wall Street Journal confirms the position:
17 October: “Stock markets – as has become their custom — took off with his (Mr Bullard’s) utterance”.
19 December: “Stocks chalked up much of their gains after the Federal Reserve signaled Wednesday that it expects to take a continued go-slow approach with any interest rate increases next year”
We all know that the Fed believes very strongly that a higher stock market is critical to achieving economic recovery. This was made clear 4 years ago by then Fed Chairman Ben Bernanke:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”
And Bernanke repeated the message in January 2011, in case investors had been asleep the first time:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”
Of course, the Fed means well. But meaning well is no guarantee of success. As countless investors keep telling me, the Fed is now essentially forcing them to invest in the stock market. Its zero interest rate policy means they cannot possibly hope to meet their pension obligations otherwise.
Yet they also know, as Prof Robert Shiller has warned, that US stock prices are out of touch with economic reality:
“If you just look at a plot of one of the major averages in the U.S., you’ll see what look like three peaks – 2000, 2007 and now – it just looks to me like a peak”
The world outside Wall St is even more at risk. Very few people on Main Street understand that today’s stock market prices are totally artificial, created by Fed policy.
THE OIL MARKET COLLAPSE IS A WARNING OF WHAT AWAITS FOR STOCK MARKETS
What will happen when this bubble finally breaks, as it did in 2000 and 2008? We cannot know. But we have to assume it will be worse than then, because markets are now so highly leveraged with debt.
As the second chart shows from Doug Short, debt levels on the New York stock market are actually higher than in 2000 and 2007. This, of course, is the direct consequence of the Fed’s policy. It not only intervenes to support markets when they wobble, but also provides investors with almost free money to fund their investments.
The result is that stock markets, like oil markets, have lost the power of price discovery. Instead, they have been taken ever-higher by Fed-inspired speculation. But now the Great Unwinding of the Fed’s stimulus policies is well underway, as developments in oil markets confirm. These have so far fallen 50%.
We can only speculate as to how far stock prices will fall once they start to realign with supply/demand fundamentals.
WEEKLY MARKET ROUND-UP
The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 53%. “With no upturn on the horizon, some players have been looking to move cargo rather than hold onto stock in anticipation of a rebound.”
Naphtha Europe, down 45%. “A narrowing of the price spread between gasoline and naphtha has resulted in unfavourable blending economics for naphtha’s use in gasoline production.”
Brent crude oil, down 42%
PTA China, down 38%. ”Operating rates of PTA facilities in China stood at around 58-60% during the week on several restarts at previously shut units”
¥:$, down 17%
HDPE US export, down 12%. “Producers pinched back reactor rates to 88.5% in November, responding to weakening demand. November still marked the fourth straight month of growing inventory, and December began with PE inventory exceeding 3.62bn lbs, one of the highest totals in the past eight years.”
S&P 500 stock market index, up 6%