Last week I read a blog written by my friend Brian Schwartz that dealt with the issue of fear and greed in financial markets, and I’ve been thinking about it ever since. I think that the policies of the last three Fed chairmen have inadvertently contributed to the dissolution of fear as a counterbalancing element, and this has placed the financial world (and thus the world itself) deeply into uncharted and dangerous territory.
During the tenure of Chairman Greenspan, the Fed used easy money policies to save the financial markets from any corrections so often that the concept of a “Greenspan Put” became broadly accepted by traders and investors. They believed that they could purchase securities at any price knowing that the Fed had their backs and would rescue the market from any downturn. Under Chairman Bernanke the Fed continued this policy of rescuing financial markets from downturns by flooding the market with cheap money, and for doing this so often Mr. Bernanke became known as “Helicopter Ben.” It was during his tenure that Quantitative Easing began, and it was his Fed that stepped in to save the banking and financial system from complete collapse in 2008. Chairwoman Yellen, who was a part of those Fed administrations, has continued the legacy of her predecessors.
As a result, an entire generation of traders and investors now exist that believe this to be normal. And, for those of us who are older and can faintly recall a time when markets were allowed to collapse without being saved, even we must now consider that there is a new reality, and we must modify our investment style accordingly lest we be left behind. So, what does this all mean? It means that everyone who is not long the market, and who is not betting on a continued bull market for securities, is at risk for underperformance. And, as a result of that sentiment even more are truly vulnerable to a correction such that the Fed’s sentiment that it must save the market lest terrific damage be wreaked is reinforced in a weird self-fulfilling prophecy loop.
The Fed clearly monitors the daily movements of the global financial markets carefully, and calibrates its policies such that it does not inflict damage. When and if markets turn down, it seems as though the Fed panics and feels the need to intervene on the market’s behalf. Politicians also seem to monitor the market very carefully. How often have we heard this administration boast in the past few years, pointing in pride to the stock market’s broad index levels as a sign of their job well done on the economic front? Those in power want high prices for securities, and seem very committed to doing what they can to insure that outcome. Questions persist at conference rooms around the world about when will rates rise or when there will be a stock market correction. My main question is: Why would government or the Fed permit either of these outcomes to occur?