One day, the Fed will try to talk the market up – and nobody will listen

Financial Events


Index Jan15In March 2007, the Financial Times kindly published a letter from me arguing that the US Federal Reserve seemed “to confuse being market-friendly with being friendly to markets“, and had forgotten

The famous dictum of William McChesney, the long-serving Fed chairman in the 1960s, that “the job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting”‘.

I spent an increasing part of 2006 – 2008 trying to warn of the growing potential for a US sub-prime collapse.  Thus a further FT letter in September 2007 was headed “Every mania is based on an illusion“, and argued:

The myth behind the US housing mania is likely to become increasingly transparent, as the fallout from it widens.”

Everybody was very nice about my efforts after the subprime disaster happened in September 2008.  Feature articles were printed with headlines such as ‘The Crystal Blog’, and the FT itself recognised I had been on the side of the angels.   But my efforts (and those of others) didn’t change anything.

In fact, history shows the Fed took exactly the opposite message from the crash.  It decided to boost markets even more, and quickly began Quantitative Easing on a $trillion scale.

The Fed’s policies today are thus even more dangerous than in 2006-8, due to its belief that a strong stock market is key to economic recovery.  As Fed Governor, Richard Fisher, admitted proudly in September, “we have been extremely helpful” in facilitating the markets 250% rise since March 2009.

And now, every time the US market has a minor wobble, the Fed rushes to soothe nerves and encourage investors to continue buying:

S&P500 Jan15

The problem is simple, as Doug Short’s chart above from Advisor Perspectives confirms:

  • The Fed’s boosting has taken US stock markets well beyond normal nosebleed territory
  • The S&P 500 is currently above 94% of all previous valuations, using Prof Shiller’s 10-year Price/Earnings ratios
  • It is also 61% above its historical average
  • And when markets finally return to reality from these levels, it is generally a very scary process
  • This time could be much worse than 2008, due to the borrowing level being so high

My “worst case”, outlined in June, is thus becoming much more likely as the Great Unwinding of stimulus policies continues.  Oil prices have now collapsed back towards more normal levels, whilst the US $ has risen very sharply – it has now broken a 30-year valuation trend, since the Plaza Accord in 1985.

And as my own Boom/Gloom Index above shows (blue column), sentiment is weakening across the market.

One day, I fear, the Fed will jump in to boost the market, and nobody will listen.



US jobs growth at risk with end of the shale gas advantage


US job markets have been very difficult since the Crisis began in 2008.  In the...

Learn more

Stock markets focus on central banks, ignore debt default risk


Some extraordinary things are happening in global chemical markets.  They indi...

Learn more
More posts
Economic risks rise as the lockdowns end

It is now 13 years since I wrote the first post here, in June 2007. A lot has happened since then: ...

China’s property sector is at the epicentre of the crisis

A branch of Centaline Property Agency in Hong Kong © Bloomberg Indebted Chinese property developers...

“They may ring their bells now, before long they will be wringing their hands”

The wisdom of Sir Robert Walpole, the UK’s first premier, seems the only possible response to ...

Will stock markets see a Minsky Moment in 2020?

Few investors now remember the days when price discovery was thought to be the key role of stock mar...

Chart of the Decade – the Fed’s support for the S&P 500 will end with a debt crisis

Each year, there has been only one possible candidate for Chart of the Year.  Last year it was the ...

$50bn hole appears in New York financial markets – Fed is “looking into it”

Most people would quickly notice if $50 went missing from their purse or wallet. They would certainl...

China’s renminbi and the global ring of fire

China’s property bubble puts it at the epicentre of the ring of fire © Reuters  China’s de...

Stock markets risk Wile E. Coyote fall despite Powell’s rush to support the S&P 500

How can companies and investors avoid losing money as the global economy goes into a China-led reces...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more