The Fed has signaled that it is trying to end QE and stock markets around the world are now writhing in agony (or the fear of coming agony). If the markets open tomorrow and we have an even bigger drop than today my bet is that Bernanke will come in with some form of methadone to calm things down, or try to.
“Step back from the ledge Mr. Market, I’ve got what you want.”
Overt Fed intervention has been behind the historic stock rally which started in 2009 from the beginning. This has made the big banks happy as they’ve been able to play with nearly free money.
But every time there has been any indication that the Fed wasn’t going to supply monetary drugs the markets have gone down and threatened suicide. We are seeing another round of this now.
Peter Schiff at EuroPacific Capital said today that he doesn’t think the Fed will actually stop easing at all. He argues that we are headed back into technical recession, and that housing prices are headed back down.
Whatever the case, the financial world is heating up big time. Given that China is headed into what looks like a version of recession, that Japan is sputtering and dipping, that Europe continues to fail, Peter Schiff may be very right.
However the great challenge here economically is whether the Fed can keep the party going (assuming they panic again if we have another big loss in the markets) without Treasury yields going up anyway (and bond prices declining). We could have a situation where interest rates are moving up, house prices decline, stocks are volatile to bearish, and employment gets another solid kick to the nether regions, even while QE continues.
And for the record, check out David Stockman’s warning at the end of March of this year-