The Fed’s Phony Boom Is Becoming A Real Bust …

No More Juice

Friday’s 391-point drop in the Dow – a nearly 2.5% fall – ended the worst 10-day start to a year in U.S. market history.

The average stock in the S&P 1500 – which includes about 90% of all stocks in listed in the U.S. – is now down more than 26% from its high. The standard definition of a bear market is a sustained fall of 20% or more from recent highs.

The bear got loose somehow. Who let him out?

Photo credit: Lukas Holas

“Woeful earnings,” suggested MarketWatch as a cause. Another guess: “The stock market is freaking out over Trump and Sanders.” Barron’s was closer to the real source of the plunge: “Without Fed’s Juice, Market Suffers Withdrawal Pains.”

In 1971, phony fiat money replaced the old gold-backed dollar… and money that came “out of nothing” replaced real savings. At first, inflation rates rose. No one trusted the new fiat dollar. But then, incoming Fed chairman Paul Volcker showed the world that the U.S. could manage its currency in a responsible way.

Consumer price inflation fell, along with interest rates. Debt increased. And gradually, every Middlesex village and farm has become dependent on more and more bank credit.

The dot-com bubble blew up in 2000. The mortgage finance bubble blew up in 2007. Now, it looks as though another bubble is deflating…

DJIA, daily – there’s not enough juice left to keep all the bubble balls in the air… – click to enlarge.

Booze Binge

In 2008, the Fed cut rates all the way down to the “zero bound” to try to keep the jig going. But after seven years of its emergency zero-interest-rate policy (ZIRP), it became obvious that something had to be done to get back to “normal.”

Like a long binge on booze and drugs, things were starting to get a little weird. The juice had to go. But we doubt that the syringes and the Johnnie Walker have been put away for long. Despite announcing a great improvement in employment, for example, there have never been so many American men without jobs.