The stock market: lots of money around


Daniel Grizel

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve, Lael Brainard, Deputy Chairman of the Board of Governors, and other Federal Reserve officials gave their support this week to the Fed’s efforts to tighten pull up the currency ropes and bring inflation back around the Fed’s target of 2.00%.

Stock prices have risen this week.

Earlier, there had been three weeks of downward movement in stock prices as the Fed continued to follow its plan to rein in consumer prices.

Investors don’t seem to want to cooperate.

Stock prices fell on Tuesday and Wednesday this month.

Stock prices rose on Thursday and Friday.

Why The Rise?

The strongest reason for Thursday and Friday’s price rise appears to be that Akane Otani and Joe Wallace presented in The Wall Street Journal.

Stocks started the week down but then caught up in the following days, with stocks of banks, manufacturers and consumer discretionary companies helping to lead the charge. Analysts said at least part of the rally appeared to be fueled by investors looking for bargains after three straight weekly losses wiped out much of the market’s summer rally.

Some indicators indicated that the market was “oversold”.

There is a general feeling that an “earnings collapse” is not in the near future.

After that, there is much, much uncertainty.

Volatility is high, very high.

Sophisticated investors see this as a chance to “play the market”.

Look for bargains. Ride them for a while. So sell.

What’s behind that?

The question is, what is behind it all?

Is there something here that we miss?

Allow me to make a suggestion.

In other areas of finance, we’ve talked about all the money the system has.

We’re talking about how the Fed needs to move beyond what it’s now trying to do and come to terms with the fact that since the start of 2020 the Federal Reserve has pumped $4.5 trillion into the world’s financial system. savings through the purchase of securities.

Current plans are to hopefully withdraw up to $2.5 trillion from these funds.

This means the Fed will leave about $2 trillion in the financial system.

At any other time, we could say that $2 trillion is “a lot of money”.

In fact, right now I’d say $2.0 trillion is “a lot of money.”

Thus, the Fed has invested $4.5 trillion in the financial system since 2020 and expects to withdraw only $2.0 trillion from it.

This, it seems, is a lot of money to “leave”.

In other words, while the Fed seeks to take a lot of money out of the economy by reducing the size of its securities portfolio, it still leaves a lot of money to chase prices, to play the markets.

We have ignored this fact from the start.

The Fed puts $4.5 trillion into the financial system, but only takes $2.5 trillion out of it. This means that there is still plenty of money to produce a rise in prices, whether it is fuel prices, property prices, stock prices, etc.

In other words, the Fed created the inflationary situation.

The Fed did it for “good reason”. It worked during the spread of the Covid-19 pandemic to err on the monetary side. He did not want to create an error by not injecting enough money into the economy.

But, now, on the other side of the “bailout,” the Fed isn’t looking the other way.

An additional $2.0 trillion in the economy can still be highly inflationary, not only for consumer prices, but also for stock prices and for the prices of other assets.

Simply put, savvy investors have a lot of money to work with, and a volatile stock market can be a great place to make a lot of extra cash.

In other words, the Federal Reserve created the situation and now, in the face of a very inflationary environment, the Federal Reserve has a responsibility to completely reverse the distortions it created.

If so, the Federal Reserve has a long way to go to help bring the US economy back to a more normal environment.


Comments are closed.