We’ve been here before. Indeed, it wasn’t so long ago.
In August 2007, the Wilshire 5000 Index, the most comprehensive measure of the U.S. stock market, was trading around 14,430. The federal funds rate stood at 5.25%. In real terms, it was about 260 basis points above the running inflation level of about 2.6%.
The Fed’s Response
In response to the first round of subprime mortgage shocks, the Federal Reserve cut its benchmark interest rate by 50 basis points over the course of its next two meetings. That left it at 4.75%.
The buy-the-dippers and the Goldilocks worshipers were jubilant. Those cuts spurred one last bullish snort and inflated the Wilshire 5000 to a peak of 15,790 on October 12, 2007.
For plain old cash buyers, it was a 10% gain in just two months. But leverage-and-options-enabled Wall Street gamblers were up 75%, at least. And they were backing up their trucks for more…
Well, it was all downhill from there.
America’s already deeply embedded structural problems – too much debt, excessive speculation – proved far too formidable for the Fed’s flimsy policy response. Money-market rate cuts and open-mouthed cooing just wouldn’t – couldn’t – do.
During the next 17 months, the Fed cut its policy rate by 500 basis points. It pushed the money-market rate toward an unheard of -2.0% in real terms.
And it was to very little avail.
The one thing you can say is that those moves buried honest price discovery on Wall Street.
Mortal blows had long since been struck against that core function, starting with Alan Greenspan in 1987. When it all broke loose in October 2007, there was massive daylight below.
The stock market’s freefall didn’t stop until March 9, 2009. By then, the Wilshire 5000 posted at 6,855. That’s a 57% slaughter for the last buy-the-dipper standing.
You’d think that kind of bloodbath would’ve debunked, once and for all, the popular delusion that the Fed is somehow a friend to capitalism.
In fact, ultimately, it’s the ignominious enemy of free-market prosperity and sustainable growth, and bubble-riding speculators too.
Indeed, by doubling down on interest-rate repression and systematic falsification of financial asset prices one more time in the wake of the 2008 crisis – and for an entire decade running – our monetary central planners and their fellow travelers around the world have set up an even more thundering financial collapse than the one from a dozen years ago.
That’s because, this time, there wasn’t even a semblance of easy-money goodness in the Main Street response to the Fed’s money-printing madness.
Real final sales have grown at just 1.6% per year since the summer 2007 pre-crisis peak. That’s less than half the long-term trend rate.
And, even more significantly, the entire industrial economy – manufacturing, mining, energy, and utilities – has expanded by just 5% over the entire 12-year period.
This bears a second take: That 5% figure is not the average annual gain. That’s the entire growth of the whole U.S. industrial economy for the last 142 months running…
So, where did all the stimulus – $3.6 trillion of balance-sheet expansion and 10 years of negative real money rates – go?
Well, there’s been a full reflation of the 57% Wilshire 5000 Index loss from the October 2007 peak. And there’s a 95% gain from the old high on top of that.
In short, that stimulus never left the canyons of Wall Street.
As one Imperial Washington insider-dandy famously observed in another context, a good crisis was wasted.
And Wall Street is now pickled with the belief our monetary central planners will never, ever again allow the stock market to fall.
That’s what the algorithms, robo-machines, day-traders, ETFs, and momentum-slurping quants are positioned to expect.
But here’s the thing: The structural imbalances – too much debt, excessive speculation – are far more severe today than they were in August 2007.
And the Federal Reserve has nothing to offer but more easy money.
We’ve seen this movie; it’s a horror show.
Have No Fear
Desperate times call for… “common sense” measures.
And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.
We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…