The Truth About the Fed That Nobody Else Will Admit

Despite what people may think, the U.S. Federal Reserve doesn't make the stock market go up... Period. I don't care what anyone else says. The Fed prints money and buys debt securities from member banks ("quantitative easing")... It's essentially swapping U.S. dollars for bonds. But the thing nobody ever tells you is that... the money […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Truth About the Fed That Nobody Else Will Admit By Dan Ferris Despite what people may think, the U.S. Federal Reserve doesn't make the stock market go up... Period. I don't care what anyone else says. The Fed prints money and buys debt securities from member banks ("quantitative easing")... It's essentially swapping U.S. dollars for bonds. But the thing nobody ever tells you is that... the money never leaves the Fed. It just sits there in the member banks' accounts with the Fed. It doesn't go into the stock market. That turns quantitative easing from "magic stock market levitation voodoo" into something as interesting and consequential as trying a different kind of mustard on your hot dog. (I'll spell it out clearly for the keyboard cowboys... It's not that interesting or consequential.) I used to say the Fed's market stimulus was like putting a penny behind a fuse (back when our homes had fuses instead of circuit breakers)... You'll keep the lights on by doing that, but eventually, you'll burn the whole house down. Scary, right? I don't say that anymore, though... That's because it's not that mechanical, and it's not that scary. It's more like Kabuki theater... The performers gesture in a grand, highly stylized way. Their costumes are lavish and colorful. But nobody is really waging war, falling in love, or committing suicide... It's just make-believe actions. It's all for show. And like the richly costumed Kabuki dancers, the Fed's activity – and announcements of its activity – does what it's designed to do... It distracts and entertains us. Real Kabuki is an entertaining distraction you sign up for when you buy a ticket to the show. But you don't sign up for quantitative easing and the accompanying noisy narrative of a Fed-manipulated market. It's more like a tax... It's the part of the price you pay that is forced upon you when you choose to get involved in the financial markets. Now, I'm not saying there's zero connection of any kind between the Fed's activity and the stock market... only that there's no mechanical, tangible connection. (Hat tip to John Hussman of Hussman Funds and Jeff Snider of Alhambra Investments for helping me figure all this out.) The point is, the Fed isn't using any kind of magic stock market levitation voodoo... The Fed's behavior is not nearly as inexplicable and consequential as that of investors who continue to believe in the central bank's power to keep the stock market propped up... even though it has presided over two of the biggest wipeouts in stock market history since 2000. Alan Greenspan served as Fed chair from 1987 to 2006... That period, of course, included the dot-com bubble and ensuing bust. And Ben Bernanke presided over the Fed during the housing bubble and financial crisis that followed in the mid- to late 2000s. Why are we all so forgiving of their total lack of ability to see bubbles? Or is it just me? Am I like the kid in The Sixth Sense? He saw dead people... I see bubbles. If the Fed has so much control over the market, why doesn't it act ahead of time to prevent the bubbles and their inevitable bursting? The Fed doesn't control anything but its own narrative... It may influence stocks for extended periods of time, but the truth always comes out during the inevitable crash. I just don't get why more people don't see it that way. As asset manager Jeremy Grantham said recently on the We Study Billionaires podcast... The most impressive thing here is... the faith the financial community has in [the Fed], despite the fact that they've been let down badly twice. These were not insignificant setbacks. The tech crash was brutal... The housing bust was merciless... And yet, it's as if it never happened... Hey, Greenspan was our friend. Bernanke was our friend, and we got croaked, guys! What is the matter with you? Greenspan was conveniently blind to the dot-com bubble... as was Bernanke to the housing bubble. Both men claimed not to see the massive imbalances that many accuse them of helping to create... It's the same way that current Fed Chair Jerome Powell claims not to see the one we're clearly living through at this exact moment. The world sits in awe of the Fed's massive money-printing capability... causing many folks to conclude that it can print enough money to keep the markets afloat. A speculative, "can't lose" psychology takes hold... Asset prices soar into the exosphere (the highest layer of Earth's atmosphere)... And finally, one day, you wake up and you're in a bubble. That day is today... Since the market rout of late 2018, investors have especially come to believe more and more in the power of the Fed to support the market's rise, even as stocks become riskier and riskier the more expensive they get. It's perverse. But as Grantham has noted, all bubbles burst at some point... And when that happens, it frequently creates a massive crisis that wipes out countless investors, banks, and others. --------------------------------------------------------------- Recommended Links: [Buy the dip? Or time to sell?]( Panic and uncertainty are taking hold of U.S. investors. The mainstream financial media is plastered with mixed messages urging you to either "buy the dip" or sell every stock you own. Who should you listen to? And what should you do with your money right now to prepare? [Get your answers right here](. --------------------------------------------------------------- [Why TaaS can make you rich]( Investing legend, Whitney Tilson has found what he believes will be the next big tech trend that will make investors rich. Over the next few years, it will change the way you eat, shop, work, and travel. Along the way, it could make you a small fortune. [Get his No. 1 TaaS pick for free here](. --------------------------------------------------------------- I'm not the only one talking about bubbles right now... David Hay of wealth-management firm Evergreen Gavekal is the latest analyst to point out in a recent blog post that the current bond market is "arguably the biggest bubble of all time." (And he noted that if it weren't for Dogecoin, he wouldn't need to say "arguably.") Bond prices are scraping 5,000-year lows... Japanese and European sovereign bonds are priced to pay negative yields... And all U.S. Treasurys are sporting negative real yields. That's all you need to know to understand Hay's argument. What's the matter with anyone buying stocks and bonds today on the (even partial) belief that the Fed is propping up those markets? There's a slight difference with bonds... Unlike in the stock market – where the effect is purely psychological – the Fed really does prop up the bond market by buying Treasurys, corporate bonds, and even high-yield (or "junk") bonds... And it props up the housing market by buying mortgage-backed securities. (We can quibble some other time about the Fed's relatively small level of activity compared to the overall bond market, which is much larger than the stock market.) I can't imagine anyone believing any kind of propping up could ever turn out well... Wall Street analysts, executives, and asset managers should march on the Eccles Building in downtown Washington, D.C., holding torches and pitchforks and demanding that the Fed stop encouraging speculative bubbles to form. But they won't, of course... They have no incentive to do so. Wall Streeters get paid based on trading activity, which would plummet if folks suddenly believed the Fed rug had been pulled out from under them. Wall Streeters also get paid a percentage of the assets they collect... So the more valuable stocks, bonds, and other assets are, the more money they make to pay for houses in the Hamptons and elsewhere. This isn't just about bubbles, either... The Fed's policy of either directly influencing interest rates and housing or indirectly running a Kabuki show for the stock market may be seen as part of a more insidious trend that includes everything from corporate welfare to stimulus checks for those put out of work by the government's Draconian COVID-19 response. Park Aerospace CEO Brian Shore improvised a stream of consciousness rant about the social impact of "cheap and easy money" on a recent investor conference call: Strange days have found us... People are getting paid not to work. Free money [is] being force-fed into the system. In the old days, people believed work was something honored and valued. It gave a person self-respect, self-reliance, [and] dignity. But now, maybe not. Free money. It used to be that you worked hard, you sacrificed, you were frugal with your money. And one day... you'd be able to use that hard-earned money because it had some real value. But now, it's just use the cheap and easy money. If it doesn't work out, it doesn't really matter because it never was really your money anyway. So it's kind of sad actually. Why bother to work hard and sacrifice because – why do that? Why not just tap into the cheap and easy money? It's kind of tragic, in our opinion. But the world... seems upside down and backwards to us. What was supposed to matter, doesn't. What was not supposed to matter, does. Backwards indeed. That's what you get when central banks and governments around the world try to "fix" the markets they broke. They're constantly running a narrative of fixing things – like markets – that work best when they simply back off and do a lot less fixing. If anybody actually cared about investors, they'd use their power and money to educate them and warn them that they won't be bailed out... instead of bailing them out. That "solution" just discourages them from becoming prudent and educated. It never permits them to learn that partaking in bubbles is a fool's errand and only ends one way... A bust. I have no idea exactly when the current bubble will collapse... No one does. But that doesn't mean it doesn't exist... The Kabuki play might seem like it can go on forever... But the curtain always drops at some point. And with that in mind today, you know what my advice is... Prepare, don't predict. Maintain a long-term perspective. Hold a truly diversified portfolio of stocks, cash, gold and silver, and bitcoin. When the bubble inevitably bursts, you'll be glad you've done that. On that note, I highly encourage you to tune in on Tuesday, September 28... When the overall market reaches extreme highs of valuation and sentiment, it's time to buckle up and hold on. That's why my colleagues and I are sitting down to discuss exactly what you should be doing with your money in the final months of this year. You're guaranteed to hear an animated discussion about the stock market and walk away with some valuable insights. Register to attend this free event [right here](. Regards, Dan Ferris September 24, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](