My friend Cullen Roche recently penned an article discussing the plunge in oil prices and the lack of a subsequent decline in the S&P 500.  To wit:
“If you had told me that oil would fall over 50% in the last 6 months I’d have bet you that the S&P 500 would be down at least 10%+. At a minimum. But that’s not at all what’s happening. Instead, oil has cratered, and the S&P 500 is down a mere 3.5%. The 2008 oil price collapse is a common comparison to what’s presently going on in the oil market, but it’s clearly been different this time.”
Cullen is right. It is different this time, at least up until now. One of the key differences between now and 2008 is the global intervention by Central Banks into the financial markets which have alleviated the perception of “risk” in the markets and various financial assets. Those interventions, either actual or verbal, has kept money flowing into the financial markets in search of return above globally suppressed yields on fixed income.
While no one knows how this ends, logic and history both suggest probabilities of a rather negative outcome. However, currently, Central Bank intervention rules the game for now. However, I thought the following points were worth your consideration with respect to the eventual “end game.”
Bill King, the editor of the King Report, recently penned an interesting point:
“Some media ran headlines and stories that stated stocks are soaring on optimism about the US economy and the Fed. These should be mutually exclusive dynamics.Â
We’ve noted incessantly over the past many months that each time stocks start tumbling on economic or political concern; central bankers rescue stocks with verbal or actual intervention. This makes for an extremely dangerous environment for investors and traders – as evinced by the sharp declines and rallies since July 2014.”
“This is how stocks reacted in 1929. However, a big difference then was the Federal Reserve was tightening rates while some NY bankers kept credit loose, effectively running their monetary policy to usurp the Fed. When the DJIA cratered 12.5% in March of 1929, Charlie Mitchell, the CEO of National City Bank and a Director the NY Fed, saved the stock market by providing credit to Wall Street.
One can argue that just like in 1929, some current Fed members, principally those from financial market areas and those that believe in the wealth effect, are running easy monetary policy to boost stock prices.
So many people were buying on margin in 1929 that there were six billion dollars outstanding in brokers’ loans as compared with one billion in 1920… The Federal Reserve Board in Washington took to brooding about this item and got into a lovers’ quarrel with the banks about it. The gentlemen in the capital wanted to raise interest rates to make borrowing a little tougher. However, the banks had no qualms at all about the mountainous speculative tides; they were doing nicely, thanks.
Thus Charles E. Mitchell, president of the National City Bank and a director of the New York Federal Reserve Bank, took a very dramatic step in March when the growing talk of a curb on loans led to a break in the market. As more than eight million shares changed hands in a wave of scare selling, Mitchell announced that his institution stood ready to put out 25 million dollars in call loans”
