Consider this excerpt from Friday’s The Wall Street Journal:
“Investors nudged the broad, widely followed Standard & Poor's 500-stock index into record territory Thursday …
The index is closely tracked by professional investors and its four-year recovery since 2009 reflects a growing belief that the Federal Reserve's continuing support for markets and the economy will overcome modest U.S. growth and lingering economic and political weakness in Europe. …
On one side, Italy's difficulty in forming a new government stoked fears that Europe still hasn't dealt with its financial problems …. In addition, new U.S. weekly unemployment claims surprised economists by ticking higher while another report showed soft manufacturing activity in the Midwest.
Offsetting those factors was an upgrade to economists' estimates of economic growth late last year. The revision reinforced a broad investor conviction that Fed stimulus is helping and that the slow improvement will prompt Chairman Ben Bernanke to continue supporting markets for months to come. …
New York Federal Reserve Bank President William Dudley said that at some undetermined point, he will favor scaling back the Fed's $85 billion-a-month bond purchases, the backbone of its stimulus.
But Mr. Dudley and Mr. Bernanke remain committed to supporting markets and the economy as long as needed, which makes many investors shrug off the other comments.”
Doesn’t give you much confidence in the stock market, does it? The stock market may be setting records*, but the U.S. has “modest growth,” and who knows what is going to happen in Europe. The stock market seems to be hitting records because of what Ben Bernanke is doing, not the U.S. economy.
And the bond market has had interest rates artificially depressed by the Fed since 2008. It’s great if you are borrowing now (and if you can find a bank to actually lend to you), but investors are not only getting low interest rates, but they have to worry that when interest rates go up, the value of their bonds will go down.
So we have a stock market that appears to be higher than is otherwise logical because of the Fed pumping out money like crazy, and a bond market with interest rates that are being held artificially low (and which is on the edge of big drop in value once rates go up again).
I don’t know if these conditions constitute bubbles, but they sure sound scary.
Plus if you think that one of the most important features of a free market system is the role that prices play in directing investment to where it can create the most growth and in telling people what they should spend their money on to get the most value for their money, all of the things the Fed is doing is distorting the accuracy of what prices are telling us.
I’m not an expert. I certainly don’t have a Ph.D. in economics. But this is scary. It seems like we are relying on just a few people way too much – especially when they are doing an awful lot of guessing themselves.
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* The Dow and the S&P 500 are at record levels only if you do not adjust for inflation.
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