The more the market’s metrics move above all rational and historic benchmarks, the greater its fall will be if the Fed pulls the plug, AND the more sensitive it will become to the Fed even wiggling the plug.
By David Haggith of The Great Recession blog
I’m not going to predict when and how the US stock market will crash as I did by laying out the stages of its fall for 2018. That was easy, but the times are different now.
Back then, the Fed had laid out a precise schedule for its tightening, and it was apparent to me where the big increases in Fed tightening would be sufficient to bring down the market that the Fed had artificially rigged.
Today, the Fed is back to easing — back to doing what it does to juice markets up. And the correspondence between what central banks do with their balance sheets and what the stock markets do is now almost 100%.
All of 2019 looks like lockstepping to me.
The Fed, of course, is the primary mover for the US market. Therefore, US stocks being overpriced in the extreme may not matter so long as the Fed is willing to keep the money pumps redlining at maximum RPM.
However, the more the market’s metrics move above all rational and historic benchmarks, as I’ll show they now have, the greater its fall will be if the Fed pulls the plug, AND the more sensitive it will become to the Fed even wiggling the plug. So, the situation is, in that sense, more perilous than at anytime past because some of the market’s most fundamental valuation metrics are now printing at levels never seen before.
Let me lay that out for you.
Market madness still being Fed
As I will lay out in my next Patron Post, the Fed has given some indication of a mild return to tightening in the near future, and that could create problems for the market. The Fed has not, however, laid out any clear schedule for tightening, and it won’t get far down that road before it sees market problems, and goes right back to easing because we are now in QE4ever by which I really mean “QE4ever or die!”
That is because, as soon as the Fed backs away from QE, it will see its dependent child go into paroxysms, and like any parent who knows he or she has a sickly child that is highly dependent on continued life support, the Fed will rush back to supporting its baby — the stock market.
Outside of Fed help, the case to be made against the market is huge — as big as it was before the last two major recessions. The market today looks in almost every way like it did just before the dot-com bust, but the difference, then too, was that the Fed started tightening back then. Therefore, as long as the Fed continues its present path of easing, there may not be anything like the dot-com bust, barring a deep recession that busts everything; but the Fed is now the only thing between the market and a bust…