The Fed's Himalayas

The Fed began manipulating stock prices about thirty years ago. Since then, each of the households in the top 1% has gained about $32 million in wealth. Down below, the wealth gain has been negligible

Source: Getty Images

Friday, September 20^th, 2024 

Bill Bonner, writing today from Dublin, Ireland  

The Fed acted. Investors re-acted. MarketWatch: 

U.S. stocks roared higher Thursday, with the Dow Jones Industrial Average topping the 42,000 milestone for the first time and the S&P 500 also surging to a record close, a day after Federal Reserve Chair Jerome Powell repeatedly used variations on the word “recalibrate” to describe the decision to deliver an extra-large, 50-basis-point interest-rate cut to kick off a new easing cycle. 

What does this mean? Were we faked-out by the stock market’s January 2022 sell-off? Are we still in the Great Bull Market, 1982 to Kingdom Come?  

You’ll recall, in January 2022, inflation was running hot and stocks turned down. It looked not just like another correction, but like a fundamental change of direction... a new Primary Trend.  

“The boom is over,” we wrote (or words to that effect). “From now on the Primary Trend is down. Because the Fed can no longer juice the market the way it used to. Any stock market gains from here forward are likely to be offset by inflation.” 

In round numbers, yesterday’s new high put the stock market about 20% above its 2022 peak. And in round numbers, consumer prices are about 20% higher too. So, investors haven’t really made any real gains. 

In gold terms, they’re still losing money. While stocks went up yesterday, gold went up too... and is now 25% higher since the beginning of this year. In January 2022, the Dow/Gold ratio — showing how many ounces of gold it took to buy the thirty Dow stocks — stood at 20. Today, it’s just 16. As expected, inflation has undermined the stock market gains. 

Most likely, the Fed will continue to cut rates. Stock prices may rise further, as inflation pressures build up in the economy. That is what the bond market seemed to be saying yesterday. Even though the Fed is now actively cutting rates, long Treasury bond yields went up. The 30-year bond now yields more than 4%. 

As for what will happen next...  

We could see glittering new highs in the Dow. And it could turn out that the January 2022 peak was not actually the Everest of the Primary Trend... but just another peak in the Fed’s Himalayas.   But for now, we’ll stick with our guess: Jan. 2022 marked a turning point.  And the primary trend is down.   

In any case, it makes little difference to us. This is not the time to go ‘all in’ into the stock market. The Dow/Gold ratio has been more than cut in half since the beginning of the century. In terms of gold, the Dow is now only worth about 40% of its 1999 peak. And as far as we know, stocks are still going down.  

Meanwhile, commentators explained that the Fed cut will ‘stimulate’ the economy. It will help guarantee a ‘soft landing,’ they said. It will ‘boost employment,’ they added. 

But so far this century we’ve seen more stimulus added to the US economy than in the entire 19th and 20th centuries combined. US debt — which only partially measures the stimulus efforts, rose from just $5 trillion to $35 trillion — a 7x increase. 

Did the economy grow faster? No. Were people richer? 

Well... some of them were. The only reliable effect of artificially low interest rates and money-printing has been to increase prices of financial assets... and make the people who own them richer. 

The Fed began manipulating stock prices about thirty years ago. Since then, each of the households in the top 1% has gained about $32 million in wealth. Down below, in the 90% of households that do not own financial assets, the wealth gain has been, relatively, negligible. 

This unfairness — not to mention the Fed’s drag on the economy — could be easily corrected. Let buyers and sellers of credit set their own rates. And, for good measure, don’t allow the Fed to ‘print’ money to lend to the federal government. 

Problem solved. If the feds insist on spending beyond their means, they’ll have to borrow the money, honestly, from savers. 

Will either candidate suggest such a thing? Of course not. But let’s look at what they are proposing. Next week. 

Regards, 

Bill Bonner