The Fed Cannot Stave Off the Inevitable Market Revaluation (August 17, 2011)
INTERVIEW ALERT: Chris Martenson was kind enough to interview me last week; the podcast and transcript are on ChrisMartenson.com. Thank you, Chris and Adam, for the opportunity to discuss relocalization and withdrawing capital from Wall Street.
The Fed has yet to learn that you can't fool Mother Nature for very long, but it's about to get a punishing lesson.
Did the Federal Reserve's QE2 program last year simply push the inevitable stock market decline forward a few months? It would seem so. In Remind Us Again Why Anyone Should Own Stocks For the Next Two Years (August 3, 2011) and The Junkie in the Pool and False Idols: Faith in Wall Street and The Fed Has Has Eroded (August 10, 2011) I included a chart of the current S&P 500 plotted against the two Great Bear Markets of last century, the Great Depression-era Dow Jones Industrial Average (1929 crash) and the Nikkei stock market from 1989.
It certainly looked like all the Fed accomplished with its $600 billion QE2 was stave off the inevitable by a few months:
Courtesy of The Chart Store, here is more evidence that the Fed just pushed the day of reckoning forward a few months: the first charts the current NASDAQ market plotted over the Great Depression Dow, and the second plots the current NASDAQ over the post-1989 Nikkei market.
The similarity of the two Bear market progressions is uncanny. As Ron Greiss of the Chart Store notes on the chart, "Did QE2 prevent nature from pursuing its intended course?" Judging by the recent "unexpected" cascade in stock valuations, it seems the Fed has yet to learn that you can't fool Mother Nature for very long:
Once again it looks like the Fed's attempt to stave off the inevitable crash in stock market valuations was temporary rather than permanent:
This week we see the same game plan being worked once again: smash the U.S. dollar and juice the risk trade, as if the inevitable recalibration with reality can be staved off forever. Judging by these three charts, that recalibration will take about another two years.
Perhaps when the stock market reaches its inevitable (i.e. unmanipulated) true value some time in 2013, then the Fed's attempts to fool Mother Nature will be seen for what they are: catastrophic failures.
Here is a bonus chart, courtesy of The Chart Store, that overlays the current rally and collapse with the Dow's 1907 crash. The similarity is rather uncanny:
As we can see, The Fed's QE2 didn't change the future decline, it simply pushed it forward a few months: the current market has now caught up with the 1907 decline.
With inflation rising and the markets falling, just how effective do you reckon QE3 or any other
gambit will be in staving off reality?
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