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Rickards: The Fed Can’t, and Won’t Try to, Prop Up the Market Forever

Daily Reckoning  ( Original )
FEB 16, 2018

In some ways, it’s difficult to blame individual investors who don’t understand that the stock market has been artificially supported and propped up by the Fed for coming up on two decades without interruption. Who believe, truly, that when they rant about the glory of “the free market” they’re talking about the US stock market of today.

Not reality. There have been a variety of puts, or downside risk delimiters, in the form of Fed chairpeople and their actions for 20 years running:

  • The “Greenspan Put,” named after Fed Chairman Alan Greenspan, was exhibited in September and October of 1998 when Greenspan cut interest rates twice in three weeks, including an emergency rate cut not at a scheduled FOMC meeting, to control the damage from the collapse of hedge fund Long-Term Capital Management.
  • The “Bernanke Put,” named after Fed Chairman Ben Bernanke, was exhibited on numerous occasions, including the launch of QE2 in November 2010 after QE1 had failed to stimulate the economy and the delay of the taper in September 2013 after the emerging markets meltdown resulting from Bernanke’s “taper talk” in May 2013.
  • The “Yellen Put,” named after Fed Chair Janet Yellen, was also on display many times. Yellen delayed the “liftoff” in rate hikes from September to December 2015 or order to calm markets after the Chinese shock devaluation and U.S. market meltdown in August 2015.

As the Dow Jones industrial average fell over 2,600 points between Feb. 2 and Feb. 8, 2018, a decline of over 10% from the all-time high of 26,616 on Jan. 25, and officially a market “correction” as defined by Wall Street, one question kept repeating in investors’ minds: Where is the “Powell Put?”

This investor view is delusional.

All of these puts are predicated on precipitous, disorderly declines. If markets exhibit a slow, steady decline over months and years, the Fed put will not apply. In that world, the Fed’s response function would depend solely on inflation and job creation, the so-called “dual mandate.” Stock investors will be on their own.

ORIGINAL SOURCE: The Stock Market Is Not Out of the Woods by James Rickards at Daily Reckoning on 2/15/18