The free market is smarter than all of us. So no matter what we predict, it could mean nothing to the free market which makes up its own mind while it’s poked and prodded in all sorts of directions and influences.
But we really haven’t had free markets due to all the stimulus pumped in to prop them up!
On Wednesday October 29. 2014, Janet Yellen and the Federal Reserve announced the end of its landmark bond buying program also known as Quantitative Easing or QE3. What was once an $85 billion a month program, adding currency at an annual rate of $1 trillion – and over its 27 month term pumped $1.7 trillion of currency into the economy – is going to zero.
So what does that mean for the financial markets which have been artificially propped up on all these cheap currency calories as discussed in other articles like Look closer: Why Hasn’t the Bear Market Attacked Yet?
Will the free market finally get its moment to show us what it will do? Could the markets be finally ready to stand on its own feet instead of having the Federal Reserve pump more currency into it?
May not be likely for several reasons.
Here are some of those reasons in no particular order.
1. The technical analysis of the entire financial markets show that the financial crash that bounced in 2009 did not finish its crash (dead cat bounce) because the Fed stepped in and artificially propped it up with QE1, QE2, and of course QE3. See Look closer: Why Hasn’t the Bear Market Attacked Yet? for more information
2. QE3 ended into weakness. Think Dead Cat Bounce. The markets have bounce off a major market correction which wiped out all the gains of the current year. Then the financial markets started going up. There may not be a lot of support from the real economy to keep the markets from crashing when it starts falling after the market bounce ends.
3. There is no where left for interest rates to go except up. If the cost of borrowing goes up, logically the economy must correct itself accordingly.
4. Fundamentally the markets are overvalued even after the major market correction that took place before the end of QE3. Price to Earning Ratios have been in a bubble for too long.
5. The bubble that was created from the creation of new currency means either a debt bubble will pop as a result of ending the stimulus or QE4 will begin to continue the bubble.
6. Overall the boom-bust cycle is heading south on both the S&P and the Russell 2000.
7. Countries are deliberately trying to avoid the US dollar like it’s a plague. There are over 20 countries that have set up swap lines to bypass the US dollar.
8. Even Former Federal Reserve Chairman Alan Greenspan says he doesn’t think the Fed can unwind years of extraordinary stimulus without causing turmoil in financial markets. Greenspan somehow reminds me of Jeff Skelling quitting Enron before the final crash. Greenspan is warning us all that QE didn’t work when it was he who arguably put us on this course many years ago with his policies. All of a sudden he’s a big fan of gold.
9. Isn’t higher gold prices a sign that there is something wrong with the economy? Precious metals have taken a beating over the last few years. But that does not mean the over all price trend of gold and silver is not going up. Whether you believe in gold and silver manipulation or not, many countries are deliberate making moves to stock up on their precious metals holdings, specifically gold and silver. This has historically been a sign of protecting against a major deflation or inflationary moves. In Germany’s case, the U.S. told them it would seven years to return their gold which they were supposed to have stored for them. Where is it? Where did it go?
10. The real market, you know the one not stimulated by cheap currency, still mat not have enough real savings to spend into a declining market.