About a month ago, Larry Fink, CEO of BlackRock, called for investors to be 100% in equities on Bloomberg TV.Â Fink justified this bull call on the basis that since Federal Reserve chairman Ben Bernanke intends to keep interest rates near the zero bound- also known as zero interest rate policy (ZIRP)- investors will find it harder and harder to garner a real return in government bonds alone.Â With the yield of a 10-year treasury at only 2% and the consumer price index hovering at 3% (if you believe the government’s flawed methodology), achieving a real return means having to invest in riskier assets.Â This means grandma will end up having to put her dwindling savings into anything with a return higher than the rate of inflation less she wants her retirement fund to literally lose its value by doing nothing but sit in the bank.Â Retirees, pensioners, and those on fixed income are always the first casualty of central bankers attempting to engineer an economic boom with the printing press.Â Murray Rothbard explains:
Particular sufferers will be those depending on fixed-money contracts â€” contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long-term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are “taxed.”
Ironically, the left which claims to champion the interests of the poor end up being their worst enemy on calling for central bank manipulation to goose the economy.Â At the same time, money printing benefits those who Keynesian commentators such as Paul Krugman or Robert Reich claim to despise: bankers on Wall Street.
In a recent speech, president of the Dallas Federal Reserve Bank Richard Fisher admitted to being “perplexed” at the “preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodationâ€”the so-called QE3, or third round of quantitative easing.”Â Seeing as how the New York branch of the Federal Reserve bank conducts monetary policy by purchasing predominantly government bonds from 21 exclusive financial institutions otherwise known as “primary dealers,” newly created funds end up flowing into these banks first before the rest of the economy.Â And as investor Ed Yarni points out, this new money is often used to bid up the stock market :
(1) The S&P 500 rose 36.4% during QE-1.0, which spanned from November 25, 2008 through the end of March 2010.
(2) The S&P 500 rose 10.2% during QE-2.0 from November 3, 2010 through the end of June 2011. It rose much more, by 24.1%, if we start the clock on August 27, 2010, when Fed Chairman Ben Bernanke first hinted that a second round of quantitative easing was on the way.
(3) Operation Twist was announced on September 21, 2011. Since then, the S&P 500 is up 15.9%.
(4) Between the end of QE-1.0 and Bernankeâ€™s speech on August 27, 2010, the S&P 500 fell 9.0%. Between the end of QE-2.0 and the beginning of MEP, it fell 11.7%.
While there is no doubt that Bernanke will take credit for the stock market’s performance after continued liquidity injections, the worrisome aspect of the above graph is not the boost in equity prices during bouts of money printing but what happens after the fact.Â When the free money comes to a stop, so does the upward trend of stocks.Â This manipulation and distortion makes it difficult to determine what is real economic growth or simply the papering over of deep structural problems.
Though many are now recognizing that the U.S. economy is showing increasing signs of life, this may be in reaction to the Fed’s broadest measure of the money supply, M2, beginning to accelerate in growth starting in July of 2011.
Given the lag time it takes for money to work its way into the economy, it shouldn’t come as a surprise then that the S&P 500 started its bull run shorty after the growth in M2 perked up.
Judging by the graphic provided by Yarni, less the money supply continues its rate of growth(which it isn’t as a quick reviewing of the Fed’s statistical releases show) the stock market boom now being lauded may come to quick end.Â The likely response will be further quantitative easing by the central planners at the Fed who know of no other solution but to meet a market correction with the same medicine that caused the disease in the first place.
The reality is that if it weren’t for previously engineered inflation, the prospect of sudden, unpredictable deflation would not be such a disastrous affair.
Like the financial crisis that was met with unprecedented dollar creation and Wall Street bailouts, the market simply tries to rid itself of the distortions caused by government intervention.Â In the case of the housing bubble, Alan Greenspan’s erratic interest rate suppression and the pro housing policy of the federal government and its partners in crime Fannie Mae and Freddie Mac lead to a highly leveraged mortgage market in desperate need of sustainability in falling prices.Â And just as always, “do something” politicians did everything they could to not let an already starved version of capitalism rid itself of the fantasy belief that government is not beholden to economic laws.
With Bernanke hinting again at buying more government bonds should the recovery lose steam, Wall Street is already celebrating judging by the recent 4 year high of the S&P 500.Â Should inflation begin manifesting itself more predominantly in consumer prices, the liquidity high will wear off as the Fed hikes rates and stock gains are wiped out.
This is what is called a zombie banking system.Â If insanity is properly defined as attempting the same thing over and over and never getting a different result, then perhaps Bernanke, his central banking colleagues, and all those academics who peddle the printing press like cure-all snake oil need to take a long vacation at the closest mental asylum in proximity.Â Maybe then Wall Street can ween itself off the drug of easy money.