The Fed's Golden Goose Kills The Bear, Fattens The Rich, Shafts The Rest

Recently I wrote a blistering rebuttal to comments made by a prominent CIO on CNBC. He was suggesting that we are in the midst of a 20 year bull run that is being driven by a strong consumer.  And that really set me off.  Now I don’t have an issue with these market ‘pros’ touting a 20 year bull run.  But lying about how we are managing a 20 year bull run undermines the struggle felt by the American middle class.  Have a look at the following charts to get a feel for where the American middle class is today and then we’ll move on to discuss how we could, in fact, be in the midst of a 100 year bull run (for if it can be 20 it can be 100).

median income

Median Net Worth short

Median Net Worth 10 to 13 short

ycharts_chart-2

What we find is that the American middle class has lost 10% of their income and taken on 250% more debt since 2000.  They’ve lost 30% of their wealth since 2000 and 40% since 2007.  We see 10% fewer employed and 100% more folks on welfare than in 2000.  And all of these figures continue deteriorating today.  So for these market ‘pros’ to suggest we are 6 years into a 20 year bull because of a strong and healthy middle class is not only deceitful it is harmful as it perpetuates the apathy that allows the current policies to continue.  The middle class has been flooded with underpriced debt to cover up the collapse in natural demand that stems from the above figures.  All of this is done to perpetuate the lie that the above figures are not so; that the American middle class is strong and healthy as that CIO suggested on television.  The nation’s policies are resulting in huge wealth gains for the top 1% while completely failing to address the struggles of the middle class which is glaringly obvious in the second chart above.  Now let’s move on to the 100 year bull run.

It is surprising to me that there hasn’t been more discussion about the market action over the past month.  We’ve seen 3 out of 4 days with below average trading volumes while 3 out of 4 days reach a new all time high.  Typically we understand low volume as a lack of liquidity leading to higher volatility and ultimately risk.  However if one were to negate the possibility of downside risk as the Fed has successfully done then the low liquidity actually greatly benefits the market.  The idea being in low liquidity, price moves get much more bang for the buck.  That is, each dollar being put to work in the market will move the market price much higher than in a highly liquid market.  And this is exactly what we see happening today; very low liquidity and new daily all time highs.

This works because the bears have finally died.  For years the bears had challenged the bulls making strong arguments that fundamentally the market is overvalued and dislocated from the rest of the economy.  And for years the bulls have retorted with the old market adage that one mustn’t fight the Fed or one will go broke proving the market wrong.  And so despite the manipulation by the Fed we had a good battle between bulls and  bears and that’s what makes a market interesting.  However, the final death blow to the bears came on October 16th.  The bears were feeling that victory was finally theirs.  That after so much resiliency and hard work they were finally getting their pay day as the market sold off by 10% with no signs of slowing.  And then on October 16th the Fed struck their final blow by coming to the rescue with notions of QE4 being ready and waiting even prior to officially ending QE3.  That was the day the music died, as it were, for the bears.  The market not only halted its severe sell off but reversed and hasn’t looked back since.

With markets up some 13% in a month one might expect significant conviction behind that kind of a move.  However what we find is a convictionless but ubiquitous bull.  Think of it like reverse gravity.  Gravity doesn’t seem like an overwhelming force as we can jump in the air quite easily, however, try defying gravity for more than a moment and see how that works out for you.  Bears took on that experiment and found it is not only futile but fatal.  The question then becomes can this bull run forever?  If the downside risk has been removed from market forces, and let’s be clear that is exactly what the Fed has done, then yes it can at least until the ink runs dry in the printing presses.

And perhaps that’s ok.  I mean perhaps the Fed having a mandate to enforce an upward moving market is a good thing for those involved and not a bad thing for those not involved.  However, in order to not be a burden on those not involved in the market  requires understanding the market is no longer a gauge of the economy or even of company performance.  It is simply a mechanism for those with some extra cash to increase that cash.  What used to be an efficient allocation of finite earned money is now simply a function of infinite printed money.  It’s a pyramid scheme but it’s a pyramid scheme with an endless supply of money to be pushed in the bottom and that equates to a real life golden goose.  Perhaps that is not necessarily a bad thing, although of course everything is a trade off in the end.   And we’ve all seen enough movies to be careful what we wish for but it is clear we will be printing endless amounts of money until the cows come home regardless and so why not have a golden goose until then.  Where it leads nobody knows but I expect nowhere good. However, this is where we are today.  Upward moving markets are being enforced by the Fed via its ability and willingness to print endless money i.e. a golden goose.

Now let me bring all of this home for us.  What this means is that there is no such thing as a trickle down recovery.  This brings me back to my original point that if we fail to acknowledge the market no longer has any relationship to the broader economy then we will fail to implement appropriate policies to stimulate economic growth.  And by failing to do so we continue the devastation to the middle class.  The continuation of the notion that the Fed guaranteeing rising stock prices will somehow boost economic growth despite 6 years of failing to do so is a complete failure by our policymakers.  I can assure you that if a bottom up recovery had failed to recover the wealth of the top one percent after 6 years we would not only see a change in policies but in policymakers.  And so to expect the middle class to simply sit and wait for the trickle to make its way down to them is truly unconscionable at this point.  So I dare say my good fellows at the top of the food chain  have your rigged market but do not allow it to impede on economic recovery by lying about some theory of trickle down recovery.  Your policy is elitist and meant to create wealth for the wealthy, now implement a policy for the rest of America.  I assure you it is in your best interest.  For, as James Baldwin proselytized, “The most dangerous creation of any society is the man with nothing to lose”.

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