No, The Bernanke Fed Has Not Ignited a Market Rally
With stock market indices having crawled back to all-time highs, highs previously attained 13 years ago, there's been the predictable talk about a Federal Reserve ignited rally. This absurd thinking populates a great deal of market commentary at the moment, not to mention that Fed Chairman Bernanke naturally believes it. Readers shouldn't be fooled.
The alleged logic underlying the above-mentioned presumption is that with all the dollars being created, they must have a place to go; the place being the stock market. Apologists for and at the Fed add on that the purpose of low rates is to force investors out of low-yielding bonds into stocks that supposedly offer higher returns.
The argument is flawed on its face. Indeed, for investors to enter the stock market with soggy dollars they must be doing so in concert with a mass exodus of investors from those same stocks. Sorry, but for every buyer there's a seller. If yield-seeking investors are piling into stocks, then bearish sellers must be exiting for them to do so.
Digging deeper into the lie that is quantitative easing, history reveals that the act of creating dollar credit out of thin air is tantamount to dollar devaluation. Stock market investors are of course buying future dollar income streams when they invest in stocks, so to believe the popular narrative about the Fed as a friend of the stock market is to believe that the central bank's devaluation of income streams is somehow appealing to investors. Not bloody likely.
Some, including Bernanke himself, argue that rising asset values drive up confidence that bleeds into the very consumption that the Keynesians at the Fed presume to be the source of economic growth. This too sounds appealing to some, but lost in this obtuse form of thinking is that all consumption in a real economy results from production first.
Put plainly, we produce so that we can consume, so to believe that the Fed's policies are encouraging real gains in stock values is to believe that a policy that discourages investment and subsequent production would be good for the stock market. Simple logic erodes the weak foundations of such an argument.
Another view promoted by the Fed is that in forcing interest rates lower we stimulate or at the very least prop up the housing market. The assumption here is that a healthy market for housing is necessary for an economic rebound that will redound to stocks. The thinking here is backwards, and puts the cart before the horse.
For one, housing is not investment anymore than the purchase of a Porsche is an investment. Instead, housing is consumption. If the Fed is encouraging more capital flows into housing it is tautologically discouraging the very saving (everything we have today is the result of saving) that authors all economic growth. Housing health on its very best day is an effect of a healthy economy, not the driver of same.
More to the point, the housing correction from 2006-2008 was the market's way of telling the marketplace that it had overconsumed on housing to the logical detriment of the economy. To believe then that the Fed's actions are goosing stocks and the economy is to believe that a lurch backwards into the very kind of consumption that fostered a banking crisis the bailout of which caused a financial crisis would somehow be good for the economy and stocks. Sorry, but on their very worst day, markets aren't this stupid.
Lastly, to believe the fanciful presumptions of the Bernanke Fed about how its doings are helpful to stocks and the economy is to ignore basic historical realities. Luckily we have the ‘70s, ‘80s, and ‘90s to measure against the Fed's arrogant conceit.
What we find is that the last time the Fed played an activist role in the economy was the 1970s. Yes, there were short-term rallies in that decade of devaluation, but overall stocks were largely flat in nominal terms, but well down in real terms.
Fast forward to the Reagan ‘80s and Clinton ‘90s, what occurred then is very telling. With the dollar strong and then largely stable against gold (it fell substantially versus the yellow metal in the ‘70s, and has done the same since 2001) stocks soared; the S&P rising 222% during the ‘80s and 314% in the ‘90s.
What the Reagan and Clinton booms reveal is that stocks, Wall Street and the economy do best not when the Fed is actively seeking to wreck the dollar, but instead soar when the dollar's value is protected. Looking at the alleged Obama and Bush stock market rallies of more recent vintage, the seen is that they did fairly well in spurts, but the unseen is how much better they would have done if the Fed's naïve machinations weren't acting as a certain barrier to real market health.
Considering the stock markets today, they've risen from modern lows reached in 2009. The guess here is that four years ago investors feared a president in Obama who would foist all manner of statist legislation on the economy with the help of a Democratic-controlled House and Senate. Political realities, including the 2010 elections, made the initial presumption a happy impossibility on the way to a quiet relief rally.
Unseen is where stocks would be today absent the legislation Obama did pass, not to mention a Fed that is doing everything in its power to block what should have been a profound recovery. Stocks have risen despite the Fed, not because of the Fed. No, the Fed did not ignite a market rally.