by
Charles Goyette

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Pig in a Poke

Beneath a photo
of Fed Chairman Ben Bernanke, the headline on the Drudge Report
Wednesday read “WAITING.”

On the expectation
that the Fed and European central bankers would do something on
the monetary front to address the condition of the economy, the
Dow ran up 286 points, its best performance of the year.

What is
the market saying?

That the resilience
of the American economy depends upon the decisions of a handful
of unelected bureaucrats made behind closed doors?

That the value
of an ownership stake in American industrial companies will rise
depending on the votes of a small group of people few Americans
could name?

That our future
prosperity is not in our hands, but determined in proverbial smoke-filled
rooms?

It may be that
no one has smoked cigars in Fed meetings since Paul Volcker, but
the power of the Fed to boom and bust the economy with money printing
continues. And so the markets, indeed the world economy, await decisions
from the Fed and their Eurocratic counterparts.

What is
it exactly that the markets think central banks like the Fed can
do?

Print more
money? The Fed has printed hundreds of billions of dollars to buy
the bad assets of the money center banks. It has printed hundreds
of billions more to buy the downgraded debt of the U.S. Treasury.
It has been great for the banksters and their bonuses, but has done
nothing for the U.S. economy.

Print more
money to lower interest rates? Interest rates are already at rock
bottom now. The yield on 10-year Treasuries has been down to a meager
1.5%. Lower interest rates haven’t restored the economy either.
Unemployment continues at depression-era levels.

What are we
to believe must have happened to enable the stock market to turn
in its best day of the year, especially after the market had fallen
throughout the month of May and had just given up a thousand points?
Was it the lunar eclipse or the transit of Venus across the face
of the Sun that had the American people awaken as one, and decide
on Wednesday to buy stocks? No, in fact, the American people did
not suddenly change their investment posture at all.

Such market
moves aren’t suddenly driven by the phase of the moon, by “animal
spirits,” or by overnight turns in public confidence. These
big, quick turns of the market happen at the hands of Wall Street
itself. It is the work of traders and fund managers attempting to
read the tea leaves of tomorrow’s action.

Now, here’s
the little secret about Wall Street professionals: Some of them,
a small minority, may actually understand the economy and monetary
matters, and what produces wealth and what does not. Most others,
perhaps more than you would want to know, do not.

But they all
want to be right about what the markets perceive, about how the
markets will react to the latest news. The issue for most is only
rarely, and then only as an academic question, whether a new Fed
initiative actually contributes to productivity and the wealth of
the American people. The incentive of traders and money managers,
their very livelihood is tied to anticipating what people will think,
right or wrong; will people think the latest news is bullish? Or
bearish? The important thing for Wall Street is not whether some
initiative is wise or foolish. The important thing is to be on the
right side of an ephemeral market move.

Now, whether
people think some announcement or new policy is good or bad is largely
determined by what they are told. And although it confounds common
sense to think that the destruction of the currency, half of every
commercial transaction, can be good for commerce, or that the addition
of more debt in an economy already being dragged down by debt, can
produce prosperity, the analysts, commentariat, and reporters, not
having seriously studied the subject, simply propagate the conventional
wisdom.

Here, for example,
are quotes from the Associated Press account of Wednesday’s
market action: “Hope that European officials would find ways
to ease the continent’s debt crisis helped launch the rally.”
And, “A speech by a Federal Reserve official also added to
speculation that the Fed may take more steps to bolster the U.S.
economic recovery.”

And so it is
that the belief, that the Federal Reserve is about to dilute the
purchasing power of the currency with Quantitative Easing III, which
produced the biggest run up in stocks of the year. Elsewhere, I
have recounted the reporting for years of new plans being hatched
“to finally solve” the European debt crisis. In a pattern
that has been repeated over and over, the news has repeatedly run
the stock market up hundreds of points. But as anybody can see,
there have been no such solutions. The reports have been false;
the plans have all failed. And after a big jump on the news, the
stock market soon gave back each of the gains it made on the naïve
reports.

On Wednesday,
the market was awash in talk of another such European solution:
The extension of more debt to solve the continent’s debt crisis.

In the meantime,
word had it that the Fed was preparing the way for QEIII. No more
waiting; the Fed was ready at last to “stimulate” the
economy again.

It may have
been enough to goose the stock market. But more such stimulation
and we will all be undone.

June
8, 2012

Copyright
© 2012 Charles Goyette

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