Fed is manipulating the stock market

Jun 9, 2011

Baltimore, Maryland

Country roads. Take me home.
To the place I belong.
- John Denver ---------------------------------------------- Don't Miss! ----------------------------------------------

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Yesterday, we drove back from a financial conference. It was held way out in western Pennsylvania. Such a beautiful area; we wondered why so few people live there.

More about that in a minute...

First, let's check the world of money.

"Bernanke comments keep equities in check," says a headline in the Financial Times.

Sure enough. The Dow ended down again - 21 points down. It's been going down for five weeks. But it's still above 12,000. So there's nothing to be alarmed about.

What did Ben Bernanke say? Not much really. He allowed as to how the economy was not as strong as he had hoped. But he said things were getting better. And he didn't mention QE 3.

So why was the market unhappy? What difference did it make what Bernanke said?

Ah...that's the funny thing. Stock prices are now the responsibility neither of willing buyers nor sellers, neither of the bears nor the bulls... but of the US central bank.

Bernanke said he wanted higher stock prices. He used QE 2 to boost stock prices. He said the "wealth effect" would make people feel better off. Then, they'd spend more money. And then, they'd actually be better off.

Of course, you can see the problem with that. If it were that easy to make people richer, why not give them more QE every day of the week?

Instead, investors know how the game works. They know you "don't fight the Fed." So, if the Fed is trying to push up stock prices with cash and credit, you go along for the ride. You buy stocks, confident that the Fed has your back.

The economy actually gets worse...as higher prices sit on family budgets like a fat cowboy on a skinny horse.

And so, the stock market comes to reflect neither the economy nor what stocks are worth. Instead, it shows what speculators think they can make from anticipating Ben Bernanke's next move. They watch the Fed. If Bernanke looks like he is going to pump in more money, they buy. If they're not sure, they wait. If they think the Fed is pulling out of the stock market, they sell.

Right now, they're selling...because they see QE 2 ending...and no QE 3 starting up.

'Wait a minute, Bill, are you saying that the Fed is manipulating the stock market?'


'Isn't that against the law?'


'How does the Fed get away with it? How come the SEC doesn't come down hard?'

Oh, you silly goose. Stop asking stupid questions. The market is fixed. The SEC is on it. It's all part of the zombie system of finance. The dollar pretends to be real money. Debt pretends to be capital. And regulators pretend to be smarter than capitalists. Details to follow.

*** We promised yesterday to tell you more about what we think Mr. Market may be up to. You'll recall that Mr. Market is wily. Sometimes cruel. Always inscrutable.

One thing Mr. Market will not do: he will not do what people expect. Why not? Because he would have already done it. In other words, if everyone thought stock prices were headed higher, they would already be higher.

From that bit of logic we infer that Mr. Market will generally do what most people do not expect...the very thing that will cause them most pain and suffering.

What's that?

Well, what lesson have investors best learned over the last 20 or 30 years? They've learned that things go up. Since 1980, stocks are up about 12 times, even after the slipping and sliding of the last 10 years.

After such a powerful performance investors trust stocks, over the long run. Indeed, many analysts refer to the last 10 years as a reason stocks should go higher over the next 10.

'It is so unusual for stocks to do so badly,' they say. 'Surely, they wouldn't do that two decades in a row.'

Oh yeah? Stay tuned.

*** We saw yesterday that the federal government's real debt has risen to $62 trillion. No way are the good citizens of the United States of America going to put their heads down and pay that kind of debt. They couldn't do it even if they wanted to.

The history of the last 30 years is a history of debt accumulation. The future...perhaps for the next 10 to 20 years...will be a story of debt cancellation, restructuring, write-offs, defaults and foreclosures.

Psst. Want to make some easy money?

If you're one of the 15 million Americans who is underwater, it's easy. If your house is worth less than the mortgage outstanding against it, simply walk away.

Why not? Do you think the bank would stick with a losing position? Uh uh. It would cut its losses. You should too.

*** Over the years, the Daily Reckoning has given dear readers two bits of good advice (and probably many bits of bad advice!)

We told readers to "buy gold on dips; sell stocks on rallies." That has been an unfailing formula, with profits every single year...and capital gains of 500% since 1999.

But there was another bit of advice we recalled yesterday. We were driving through the mountains of Western Pennsylvania, in an area called the Laurel Highlands. Full of green meadows. The kind of country roads that made John Denver a fortune. Timber just waiting for a chainsaw. And stones so well cut, by nature, they practically lay themselves into a wall.

How many people are underwater here, we wondered. Probably not many. Because there are few new houses. Instead, the houses old -- many of them designed in the disgraceful hick style...in a variety of cheap shapes and sizes...and falling apart.

It would be so easy to live well here!

Which reminds of us our advice. In 2005 or 2006, we advised dear readers to sell their expensive digs in New York or California...and to relocate where prices were low and living was easy. Between the average house in southern California and the average house in rural Texas, Tennessee or Pennsylvania there was a difference of about $300,000.

"Use it to buy gold," we advised.

Western Pennsylvania would still be a good bet. Prices are low because it is far from metropolitan areas. We did not have time to do any research, but we'd be surprised if you couldn't find a nice piece of property - perhaps with a tear-down house - for less than $100,000. Then, with so much timber and stone around, it would be easy to build a nice house. You could plant a garden too. And live an idyllic life, far from the concerns of suburbia.

"But what would you do there," asked Elizabeth when we divulged our plan.

"Never mind," we replied.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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