The Bubble Machine

The launch angle of the U.S. stock market over the past decade has been steep and relentless. The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent. New highs continue to be reached practically every day.


S&P 500 weekly, since the low of 2009. A party of roaring 20s proportion in terms of duration, extent and end point valuations (a post-war inflation episode triggered a devastating bear market from November 1919 to August 1921, in which the DJIA fell from ~120 to ~64 points. It then rose until early September 1929, topping at ~380 points. By the time it peaked, Wall Street had created all sorts of new-fangled instruments such as the then highly popular investment trusts, everybody was speculating on margin and the equivalent of today’s FANGs such as RCA (“Radio”) traded at previously unheard of multiples – as did the rest of the market. Numerous sharp corrections along the way had eradicated the perception of risk in investors’ minds. We have discussed the parallels between the two eras before, and in the meantime another parallel can be discerned in the charts. In late 1928 the market suffered a sharp sell-off in the normally seasonally strong period, very similar to what occurred in 2018. It was the biggest correction of the entire bull market, but the market swiftly rallied again and by February 1929 it made new highs. It then proceeded to build a chart formation known as “three peaks and a domed house”. The three peaks of 2019 are not a perfect replica of the basic schematic of the formation, but the timing is in line with it (they are supposed to be established within 6-10 months). George Lindsay’s original schematic is very detailed, it is therefore unlikely that the pattern will repeat perfectly every time. The so-called domed house can take up to 7 months to form, but we would focus on the shape rather than the precise duration. Whether the formation does indeed form remains to be seen. It is definitely something worth keeping an eye on. [PT]


Over this stretch, many investors have been conditioned to believe the stock market only goes up. That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening. You can count on it.

In the interim, the bull market may continue a bit longer… or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price. A gamble that the launch angle furthers its steep trajectory. Here is why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent. This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices.

Hence, the bull market in stocks is not a function of a booming economy.  Rather, it is a function of Fed insanity. And its existence becomes ever more perilous with each passing day.


Total US credit market debt, Wilshire Total Market Cap Index, US federal debt and US GDP. One of these is not growing as fast as the others and the gap keeps widening. This is prima facie evidence that “we” cannot “grow our way out of debt”. The moment debt growth falters even slightly, the economy suffers a major retrenchment, as last demonstrated in 2008-2009. [PT]


Central planners at the Fed – like other major central banks – have taken monetary policy to a state of madness. Zero interest rate policy, negative interest rate policy, quantitative easing, operation twist, quantitative tightening, reserve management, repo market intervention, not-QE, mass-asset purchases, and more.

These schemes have fostered massive growth in public and private debt with nothing but lackluster economic growth to show for it. What’s more, these schemes have produced massive asset bubbles that have skyrocketed wealth inequality and inflamed countless variants of new populism.

Yet the clever fellows at the Fed are blind to the fact that they are responsible for fabricating this monster. And now they want to rectify the ghastly deformities of their creation…


Higher Calling

Earlier this week, for example, Minneapolis Fed President Neel Kashkari remarked that:


“Monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials.”


How exactly Mickey Mousing with credit markets could attain this objective is unclear.  But, like yield curve control (YCC), Kashkari wants to give it a go. These sorts of amorphous meddling operations is how he answers his higher calling.

You see, Kashkari’s a man with crazy eyes.  But he is also a man with even crazier ideas.  He is an extreme economic interventionist – and a crackpot.  Though he wears his burdens on his sleeve.

If you recall, as federal bailout chief, Kashkari functioned as the highly visible hand of the market. When the sky was falling in early 2009, he awoke each morning, put on his pants one leg at a time, drank his coffee, and rapidly funneled Treasury Secretary Hank Paulson’s $700 billion of TARP funds to the government’s preferred financial institutions.

Incidentally, the experience had an ill effect on Kaskkari’s mental health.  Soon after, he became a hermit, took to a cabin in the Sierra Nevada Mountains – near Donner Pass – and pursued his other life’s purpose of chopping wood.  We thought we had seen the last of him.


Neel “crazy eyes” Kashkari, the wood-chopper. Apparently there is nothing the Fed cannot do (note that the Fed recently seemed to unilaterally expand its mandate to include the “fight against climate change”. In early November several Fed officials came out to state that it was going to become a major factor in how it regulates banks and conducts monetary policy. This comes on the heels of previous mandate expansions, such as the undeclared mandate to prop up the stock market and the declared one to rescue the repo market by becoming its main counterparty). [PT]

Photo credit: Linda Davidson


But sadly, it is impossible for true believers to amiably exit the trappings of public life for good. After a failed California gubernatorial campaign in 2014, losing to retread Governor Jerry Moonbeam Brown, Kashkari resurfaced as Minneapolis Fed President in 2016.

We suppose this appointed position was his reward for the abuse heaped upon him from grandstanding Representatives – absolute losers like Barney Frank and Maxine Waters – while handing out vast quantities of taxpayer dollars to Wall Street banks. Of course, for real public servants like Kashkari, appointed positions are the crème de la crème.

Strangely, lightning strikes twice for this guy.  Next year, roughly a month from today, Kashkari will be a voting member of the Federal Open Market Committee.  For the second time in 11 years, destiny will place him at the precise location where he can exact maximum destruction upon financial markets during a colossal crisis.


The Fed’s Answer to the Ghastly Monster of its Creation

If the economy stalls out in 2020, U.S. deficits are likely to jump to over $2 trillion a year – and will stay there.  So, too, the national debt will run up towards $40 trillion over the next decade. The Fed, through YCC or some other wild scheme, will take on the dirty deed of monetizing this debt. They will create more money from nothing and lend it to the Treasury.


Monster, ghastly. [PT]


Then, if Kashkari has his way, the Treasury will send out checks backed by the Fed’s funny money to William Jennings Bryan’s “struggling masses.”  All the while, the Fed will be oblivious to the fact that these are the same people who have been hollowed out by the wealth inequality promoted by the Fed’s own policies. This is their solution to the ghastly monster of their making.


Late 18th century populist and frequent unsuccessful Democratic party presidential candidate William Jennings Bryan and his famous “cross of gold”. [PT]


Still, the Fed and Kashkari are only the source of but some of the crazy ideas being burped about. Moreover, an election year always provides a startling preview of the madness coming to Washington – regardless of who wins.  The styling may be different. But the results are the same: bigger government, bigger deficits, and greater government control and encroachments upon individual freedom.

Right now, Presidential candidates are tripping over themselves to see who can make greater and crazier promises to coat the landscape in gravy for voters to sup off of. You know what we are talking about…

Economic patriotism. Universal basic income. Modern monetary theory.  Trade wars. Green new deal. Quantitative easing for the people. Generous spending packages. Free school. Free drugs. Canceling debt. Wealth taxes. Taxes on unrealized capital gains. Outright currency destruction. And much, much more.

The planners and schemers are queuing up these ridiculous plans for just the right moment.  That is, when the economy slows, credit markets freeze, the stock market crashes, the sky falls, and all hell breaks loose.  Like TARP, or the Patriot Act, they will roll them out at the precise moment of maximum panic.

Alas, the monster will rampage in wild and unexpected ways.


Charts by stockcharts, St. Louis Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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2 Responses to “The Fed’s Answer to the Ghastly Monster of its Creation”

  • utopiacowboy:

    The Fed is going to continue to support the stock market and it’s going to continue to go up. Whether you like it or not, don’t fight the Fed.

    • TheLege:

      Yeah, but what about gold? I sold everything I had at $1,250 because you promised it was headed below $1,000 which is where I plan to buy back in. And now ….

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