The End Of Bear Markets

My…my…how quickly we forget.

Yesterday, as the markets rocketed higher, my email lit up with questions surrounding the discussion from this last weekend’s newsletter.

“I have questioned over the last couple of weeks exactly how much volatility the Fed would allow before stepping into the fray to keep the markets stable.

We now know it is roughly a 10% decline.

Specifically were the comments about QE being ‘useful to have in the toolkit for those times when the short-term interest rate tool may not be available,’ adding that the Fed is ‘quite likely’ to require large-scale asset purchases again because real rates will remain low due to slow productivity and labor-force growth. They also added that ‘if LSAPs are indeed not effective, then the Fed may need to take other measures.’ (Zerohedge has the complete article.)

In other words, despite the rhetoric to the contrary, the Fed isn’t going away…….ever!”

The deluge of emails revolved around much of the same premise.

“If the the Fed isn’t going away, then why would there ever be another bear market?” 

It is certainly an interesting question, particularly as the Fed continues to trot out officials to make market supporting statements such as Fed Vice Chairman Quarles who stated on Monday:

“It might seem reasonable to assume that faster growth would lead to firmer inflation. However, I think a lot remains to be seen.” 

Or even Mario Draghi, Chairman of the ECB, who said:

“In the presence of an economic situation that is improving constantly, we need the right blend of measures. Uncertainties continue to prevail.”

So, despite economies that are supposedly improving, Central Banks continue into their tenth year of “emergency measures.” As Michael Lebowitz recently stated:

“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”

 

With that, I certainly understand the reasoning that if indeed “Central Banks” are now committed to monetary interventions going forward, the financial markets have been effectively “fire-proofed against bear markets.”

But such a belief is extremely dangerous.

It is also the same “belief” every major bubble was built upon throughout history and driven by the same underlying foundations.