The Central Banks Are Now Ready To Launch Their ‘Brave New World’
by Brandon Smith
The latest Federal Reserve meeting in Jackson Hole, Wyoming, is over and so far it would seem that the general investment world is not too happy about Janet Yellen’s statements as well as those of other Fed officials. In fact, many people are looking for some simple clarity as to what the central bank is actually planning.
Most importantly, investors want to know why the Fed is suddenly so adamant about continued interest rate hikes in 2016. Only a couple months ago, almost everyone (including alternative economic analysts) was arguing that the Fed would “never dare” to raise rates again so soon, and that there was no chance of a rate hike so close to the presidential elections.
Instead, investors have been greeted with surging rate-hike odds as Fed officials openly hint of another boost, probably in September.
As I have been saying for years, if you think the Fed’s motivation is to protect or prolong the U.S. economy, then you will never understand why they do the things that they do. Only when people are willing to accept the reality that the Fed’s job is to undermine the U.S. economy can they grasp central bank behavior.
Here is the issue that scares mainstream markets — many day traders are greedy, but not necessarily dumb. They KNOW full well that the only pillar holding up stocks at record highs has been central bank intervention. A vital part of this intervention has been the use of near-zero interest rates. That is to say, cheap and free overnight loans through the Fed have allowed banks and other corporations to remain “solvent,” and these loans have been the fuel companies have used for corporate buybacks of stocks.
Corporate buybacks have been a primary driver in the bull market rally that supposedly saved the world from the ongoing deflationary destruction of capital. In 2015, buybacks reached historic levels and garnered one of the largest equities reversals in history. While these buybacks do little or nothing to heal the economy on Main Street, they certainly do wonders for equities portfolios. By buying up their own shares, corporations boost the value of remaining shares through a brand of legal trickery. And, in the process, these corporations also boost the overall perceived value of global stock markets.
As Edward Swanson, author of a study from Texas A&M, noted on stock buybacks used to offset poor fundamentals:
“We can’t say for sure what would have happened without the repurchase, but it really looks like the stock would have kept going down because of the decline in fundamentals… these repurchases seem to hold up the stock price.”
Yes, to us he seems to be stating the obvious, but for the average American, a green stock market means a recovering economy. There is no deeper question of why the markets are rallying, and this lack of understanding is dangerous for our country.
Even marginal hikes in borrowing costs will kill the party and, while people not involved in finance and stocks are oblivious, day traders know exactly what is going on. This is the reason for the underlying panic felt by the investment world at any hint of a rate hike by the Fed.