Over to You...Fed?

The Markets are moving South.

Morgan Stanley has advised that unless rates fall, this market has hit its top. But has it?

We have been in mass monetary and fiscal stimulus mode for a decade. Central Banks have sparked massive worldwide bubbles in equities and housing, through a low interest rate policy that has no precedent in terms of its magnitude and how long it has been applied. With rising rates, these bubbles should all collapse.

Unless!! Unless Central Banks, especially the US Federal Reserve Board just starts to print money to buy stocks to keep equities markets high!

The 10-year bull market in stocks has been a direct result of Central Bank policy. The low rates fuelled stock buy backs that pumped prices to their highest levels ever. Wealthy people have never made so much money. 

But making money for rich people is not why we have these central banks. These banks are supposed to make policy to support employment with low inflation. There is no logical link between the price of shares and employment - if there were, then central banks would have applied the policy of buying shares to build the economy for the last century or so.

As with the ruinous policies of the last decade, Japan may be our precedent. The Japanese stock exchange dropped by 50% in 1990, and never recovered. The Japanese central bank intervened long ago to support the stock market and now owns 80% of all the ETFs and has at least a 5% stake in over 30 equities on the Nikkei stock exchange. 

Printing money to buy any assets is a completely false economy...there is no actual demand. Japan is not moving in a good direction.  When the central bank there owns the majority of all stocks - and all bonds, as it is about the only buyer of Japanese government bonds now - these markets should collapse as the fact that there are no real markets there, and these assets are worth almost nothing, will be clear to all. Anyone left in those markets will be wiped out.

And so, if the US Fed and other central banks do start buying shares as a result of falling markets - all while telling us hat this is all about helping the little guy - what will that tell us about who they really work for?

Answer....not you.