Things haven’t been sound on the money front for a long time, and certainly not since the Fed was created and we left the gold standard.
What took place in stocks late in the year can honestly be described as a bloodbath. Only the most extraordinary policy reversal by the Federal Reserve was able to keep Wall Street, hedge funds, and their robot algorithms trading in the game.
We turn now to the fearless David Stockman, President Reagan’s budget director and himself a long-time Wall Street veteran, to synopsize exactly what happened.
On April 24 Stockman wrote, “Between the September 21 intra-day high of 2,941 and the 2,351 close on Christmas Eve, the S&P 500 index dropped by a stomach-churning 25% in just 64 trading days.”
That’s what happened on the down-side. It was simply brutal. And who knows how much farther it would have fallen, had it not been for Fed chairman Powell’s sudden policy pivot.
A few days later, on April 29 Stockman described what happened with the engineered bounce-back. “To wit, since Christmas Eve the Dow is up 22%, the S&P 500 is higher by 25% and the NASDAQ-100 by a scorching 33%. …
What about the FAANG Stocks?
“Facebook is up 56%, Apple 39%, Amazon 69%, Netflix 59%, Google 25% and Microsoft 38%. In all, these six stocks put on $1.25 trillion of market cap that wasn’t there on Christmas Eve—- rising from a combined value of $3.21 trillion to $4.46 trillion in virtually a heartbeat.”
What should have been learned from the episode? Simply this: That stock valuations are not trading on the basis of business fundamentals. After all, nothing changed about Amazon’s business during that period to justify a 69 percent increase in its value. Stocks are not trading on fundamentals, on their dividends and earnings, on their P/E ratios, or on profitability.
They are trading on the basis of momentum only. When that broke down, the Fed was able to reverse the momentum for the time being by promising to firehose more money and credit Wall Street’s way.
Stock market valuations are an illusion, the product of the Fed’s monetary sleight of hand.
In other words, the stock market is once again hanging by a thread.
Now you would think that after the dot.com bubble and the housing bubble, the people would be in no mood for a third Fed-engineered bubble in this young century. But people don’t really understand how these things work. And the media doesn’t help them.
That’s why we take it as part of our job to help them figure it out with these posts, to show them the wizard behind the curtain.
And to show them how to protect themselves with gold and silver.
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