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by Jim Quinn

Trump is right. The Fed is to blame for the coming crash. But, the crash is not because of their tightening. The crash is coming because of their 8 years of 0% interest rates. Real interest rates are still negative. Only an idiot would say the Fed is too tight. Trump reveals himself again.

Guest Post by John Hussman

Yesterday, the U.S. market lost over $1 trillion in market cap. Who got it? Where did it go? Nobody, nowhere. Market cap = price x shares outstanding. Every share has to be held by someone every moment until it’s retired. There is no “getting in” or “getting out” in aggregate.

At the recent market peak, the most reliable measures of U.S. equity market valuation (those best correlated w/actual subsequent long-term returns) were ~200% above (3 times) historical norms. No market cycle, not even 2002, 2009, has ended at valuations even half that level..

Money isn’t coming “into” or “out of” stocks. Every dollar a seller gets out is from the hands of a buyer who just got the shares. The amount of “cash on the sidelines” is EXACTLY the same as it was before that trade in the secondary markets. Let’s look at this deeper…
Securities are created when the savings of one persion in the economy are intermediated to someone else. Once they come into existence, they just change hands until they are retired. What creates price movements is the eagerness of buyers vs. sellers. Not “money flow.”
Even when the Fed “creates” money, it buys outstanding bonds, and replaces them with base money (currency and reserves) that has to be held by *someone* at every point in time, in the form of base money. In aggregate, it can’t go “into” anything else. It just changes hands..

When investors are inclined toward risk-aversion, safe liquidity becomes a desirable asset (even at low yields) rather than an “inferior” one. That’s why Fed easing had no effect in supporting the market throughout the 2000-2002 and 2007-2009 collapses.

So while Fed policy encouraged recent speculative extremes, it also created a situation where investors, in aggregate, are likely to experience poor long-term returns and lose enormous amounts of perceived “wealth.” The root cause is deranged Fed EASING, not Fed tightening.


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