The stock market experienced a significant downturn on Tuesday, with the DOW plummeting 272 points. What did this decline signify? Could it be the long-anticipated market reversal, or merely a temporary blip before new highs?
By Wednesday, the situation seemed clearer. The DOW surged back, gaining 274 points and more than offsetting its losses from the previous day. It turned out to be the best trading day of the year, leaving Wall Street in a state of euphoria.
Even gold stocks enjoyed the boost, with junior mining stocks, represented by the Junior Gold Miners ETF (GDXJ), soaring by 9.61 percent. Fixed-income investors were also optimistic as yields on the 10-year treasury note dipped to just 2.32 percent, approaching their 52-week low of 2.30 percent.
But what fueled this excitement? Were we witnessing skyrocketing GDP, rising incomes, a withdrawal of Russian troops from Ukraine, or the discovery of an Ebola vaccine?
Not at all. The driving force behind this market frenzy was what we refer to as worshiping utterances. In essence, the release of Fed minutes hinted that interest rates would remain low for the foreseeable future.
Money Is Not Wealth
At the Economic Prism, we find it utterly baffling that financial markets now react based on the whims of a board of unelected officials. Yet, this is the reality we navigate. We don’t oppose it; instead, we find humor in it.
The persistence of near-zero federal funds rates — maintained for six years — is expected to bolster the economy. But how can this be true? Although this extreme monetary policy generates more credit-based money, it doesn’t create real wealth. Steve Forbes articulates this point:
“The global economy is a mess today because most economists, bankers, and political leaders don’t grasp this basic concept: money. Historically, before Keynesian influences, economists understood that the real economy hinges on the creation of products and services, while money merely served as a symbol of value — facilitating commerce.”
“The ability for people to trade is pivotal for enhancing living standards. Money quantifies wealth; it is not wealth itself. It’s a claim on the products and services people have generated. Counterfeiting is illegal for a reason; it constitutes theft. Yet when the government engages in this practice, it’s termed quantitative easing or stimulus.”
Following Keynes’ blueprint, today’s monetary policy focuses on manipulating money supply to drive economic output, a misguided approach that, in Forbes’ words, has left the global economy in disarray.
Buyer’s Remorse
While this artificial influx of capital does not foster a robust economy, it has led to substantial distortions, particularly in asset prices. Stocks, bonds, real estate — all have been inflated significantly due to ongoing stimulus measures.
The scale and duration of this phenomenon far exceed what a reasonable person could have anticipated. Perhaps the DOW will reach 20,000 before the trend reverses… or even 30,000. Why not?
However, this surge will ultimately falter. Prices will decline, and the reliance on credit-based money will lead to another inevitable debt collapse.
In simpler terms, the economic foundation will be stripped away. This scenario is not a failure of capitalism; it’s a failure stemming from central planners who rely on monetary policy to manipulate free markets through heavy-handed interventions.
Following Wednesday’s optimistic trade, traders awoke with a stark case of buyer’s remorse. Their feelings of guilt and shame stemmed from their misplaced faith in the power of these “utterances.” The DOW subsequently tumbled down by 334 points.
Brace yourselves for anything and everything. Above all, remain prepared for potential catastrophe.
Sincerely,
MN Gordon
for Economic Prism
