“Alea iacta est” – Julius Caesar
This week marked a significant milestone as the NASDAQ surpassed the 5,000 threshold for the first time since 2000. The world today is almost unrecognizable compared to how it was fifteen years ago; nearly every aspect of life has transformed.
Back in those pre-9/11 days, opportunities seemed boundless. With grit and determination, we believed we could achieve any dream. However, the reality was much harsher than we anticipated, making it difficult to merely scrape by. With the NASDAQ’s achievement, several questions arise…
What does NASDAQ 5,000 actually signify? Is it a marker of strength? Does the foundation supporting it hold steady this time, or are we at risk of another drastic downturn like the one experienced before?
No one has the definitive answers. However, at Economic Prism, we suspect a substantial correction in NASDAQ’s trajectory may be on the horizon. A dip of 20 percent, 40 percent, or perhaps even more seems possible.
It’s essential to acknowledge that the quality of NASDAQ stocks is markedly better than it was 15 years ago. Today, reputable companies such as Google, Apple, and Cisco contribute to its resurgence, which isn’t solely based on speculative IPO excitement. Still, we believe there’s a far deeper story behind this recent rise that goes beyond the 5,000 points.
Crossing the Rubicon
The same factors that fueled the NASDAQ’s rise past 5,000 also pushed the S&P 500 over 2,000, and even elevated the prices of abstract art to astounding heights. This phenomenon is primarily due to the access to cheap credit made possible by the Federal Reserve. Investors seem willing to throw money at practically anything.
What would happen if the Fed’s low-interest rates were removed? The resulting decline in both stock and art prices would likely be severe. At this point, there’s no turning back…
According to a Bloomberg report, Ben S. Bernanke recognized back in March 2009 that the Federal Reserve had crossed a critical juncture when it dramatically escalated bond purchases to combat the most intense recession since the Great Depression.
“I think that crossing the Rubicon will have a significant announcement effect, signaling our readiness to take further steps if necessary in the future,” Bernanke explained during discussions about a $1.15 trillion increase in asset purchases.
Bernanke’s comments were part of a larger strategy known as quantitative easing, with officials highlighting the urgency of the situation. The transcripts detail the Fed’s commitment to a vigorous response.
Ultimately, what does this mean for our future?
The Die is Cast
When Julius Caesar crossed the Rubicon River in 49 BC, he understood that retreat was impossible. His decision to cross signaled an act of rebellion, leading his army into direct conflict with Pompey and ultimately Rome. In an account by the Roman historian Suetonius, Caesar was depicted contemplating his monumental choice:
“As he approached the banks of the Rubicon, the boundary of his province, he paused, considering the gravity of his action. He addressed his troops, saying: ‘We can still retreat! But once we cross this bridge, we are left with no choice but to fight!’”
Despite his hesitation, a sudden incident was enough to spur him on—a man played a pipe, rallying soldiers to follow him across. Caesar declared, ‘Let us proceed where the omens of the Gods and the actions of our enemies compel us! Alea iacta est [the die is cast]!’
Like Caesar, the Federal Reserve faces a similar crossroads. Though they may claim intentions of eventually shrinking their bloated balance sheet, the reality is that retreat is no longer an option. To backtrack now would invite immediate disaster. Their only viable path is to move forward, continually reshaping financial markets and the broader economy, likely to the very end.
Sincerely,
MN Gordon
for Economic Prism
