The essence of the following article was posted three years ago. Mother Nature took her sweet time, but she is finally imposing her will on a rigged stock market and she is doing so with a vengeance. It is sad that it has come down to this. The Federal Reserve thought it could control the free market forces of supply and demand without any repercussions. As a result, the Fed, through its Zero Interest Rate Policy and numerous Quantitative Easing programs, forced countless investors into risky assets they would otherwise have avoided. The Fed’s reckless, know-it-all monetary policies have been particularly hard on savers and seniors. Now the chickens are coming home to roost.
At this point in the unrelenting bull market that began in March 2009, many market observers suspect or are convinced that the stock market is rigged. One only has to look at the chart below to see the strong correlation between growth in the Federal Reserve’s balance sheet and stock prices to know that the market’s rise has been fueled largely by the Fed.
Complacency has many investors tightly in its grip, even in the face of a fierce market pullback. Don’t-Fight-the-Fed investors will stay long, and even add to their positions, as long as the Fed is accommodating and keeps printing money. For these stalwarts, any correction will be brief and should considered a buying opportunity. The Fed is just too powerful to second-guess and is obviously intent on propping up the market, hell or high water. As far as these investors are concerned, the Fed has their back and will continue to have their back because doing anything else is unconscionable.
Even if the Fed increases interest rates, as it has gradually begun to do, the tacit assumption is that the Fed will quickly reverse course, if a market decline gets out of control. Therefore, any pullback will be short-lived. This logic assumes the Fed is the final arbiter of economic and market outcomes and doesn’t account for other factors that are beyond the control of central bankers.
Upsetting this smug calculation is Mother Nature, who has a knack of frustrating man-made schemes, including rigged markets. Mother Nature is the mother of all black swans. The saying is you can’t fool with Mother Nature for long before she gets her way. She always prevails because nature works in cycles. Although nature’s timetable is unpredictable, excesses must be wrung out of the system, one way or another.
Market technicians, or chartists as they are called, have been predicting a significant market pullback or an outright crash for years and have been consistently wrong. Attempts at making correlations with prior market performance no longer work because our financial markets have never been manipulated like the current one. Chartists are frustrated because the data; i.e., stock prices and volume, are being manipulated by forces that defy the principles of technical market analysis. Because the data is corrupt, garbage in equals garbage out.
So, where does this leave us?
It leaves matters in the hands of Mother Nature, which will surely exact her toll. And this, in turn, leaves investors extremely vulnerable. Robert Louis Stevenson once said, “Sooner or later everyone sits down to a banquet of consequences.” If you think a group of largely unaccountable insiders at the Fed knows better than Mother Nature, then you should stay long. Good luck with the proposition that you can just ride it out. Prolonged excesses will take time to purge, and that time duration may be longer than you bargained for — much longer.
You don’t want Mother Nature to be the black swan that blindsides you when it is evident that our financial markets are no longer tethered to the natural laws of supply and demand. Price discovery has devolved into manipulation by central planners to achieve a desired price target, which, in this case, means driving the market higher.
When a rigged market is unmoored from the market’s primary mission of seeking fair price discovery, it’s time to look for a safe harbor. That isn’t being bearish. It isn’t being alarmist. It’s the prudent thing to do.