On Tuesday morning, the Federal Reserve woke up and saw the stock market was going in a strange direction it was not supposed to be going; down.Action was taken immediately, beginning with San Francisco Fed President John Williams who said, "if we get a sustained, disinflationary forecast.....then I think moving back to additional asset purchases in a situation like that should be something we seriously consider."
The stock market regained its footing on Tuesday and by Thursday afternoon it was time for another Fed member to turbocharge the rally. St. Louis Fed President James Bullard stepped up and said, "we have to make sure that inflation expectations remain near our target. And for that reason, I think a reasonable response by the Fed in this situation would be to.....pause on the taper at this juncture, and wait until we see how the data shakes out in December."
Wow.
Only two weeks ago there was an across the board consensus coming from the Federal Reserve that not only should QE be stopped, but the Fed should immediately begin raising rates in 2015. The Fed's dual mandate is to promote low unemployment combined with stable inflation (discussing the absurdity of this dual mandate is beyond the scope of this discussion). The number of people applying for unemployment in the U.S. this week fell to a 14 year low. Combine that with a falling cost of living due to the energy decline and the Fed's dual mandate looks right on track.
However, there was one sector of the U.S. economy that experienced severe deflation this week: the U.S. stock market. The Fed's immediate reaction to talk up the market with unemployment improving and inflation falling reveals the Fed's true mandate: promoting a higher S&P 500 close at the end of every trading week.
The most interesting part of this sham is when the real sell-off arrives market participants will see that the Fed is actually powerless to stop it.
There is one last option, the "nuclear" option, that can be employed during a stock market collapse; large scale purchases of U.S. stocks through QE (printing money to buy stocks).
This is the weapon of last resort, and I expect it to be used in the latter stages of the coming crisis in the massively overpriced U.S. markets. Japan is already employing this strategy with their central bank currently in the market every month making stock purchases (alongside their enormous bond buying program).
So how will this all play out and under what timeline?
I have absolutely no idea. If anyone tells you they do, politely excuse yourself from the conversation and walk away.
We are so far away from charted territory and so far away from anything that remotely resembles a real market it is beyond impossible to try and figure out how the market will react in the short term to every central bank intervention.
In the long term, what we do know with assurance is that every central bank intervention fundamentally weakens the general economy and financials markets. It is a poisonous intravenous fluid continuously injected into the arm of the financial system.
It is fairly simple to understand that a debt problem cannot be solved with more debt and printed money; it will only create a larger and delayed crisis in the future. Yet, after years and years of a market rally combined with central bank board members holding fancy economics degrees telling the world they have everything 100% under control, people believe the wizard is real and there is no reality waiting behind the curtain. In the end there will be chaos.
For more on the coming change to voting Fed members (who will be promoting additional QE) see:
Jim Rickards On The Structural Depression, U.S. Dollar & Gold
