Despite what you are told, there are no “bubbles” and certainly no “powered bubbles”
It was December 1994. Mexico did what badly run countries often do and devalued its peso. The devaluation of the currency is an obvious economic drag because it first deprives citizens of the fruits of their labor, only to have its bitter fruits felt again through the reduction of investments which logically shrinks the quantity and quality of labor.
1994 is mentioned simply because Washington Post Columnist George Will had a meeting with future House Speaker Newt Gingrich in December of that year, only for Gingrich to voice his fear of the global market sell-off sparked by incompetence inside Mexico. . Will calmly reminded Gingrich that if “everyone is selling”, then by definition “everyone is buying”.
The truth Will expressed to Gingrich is something routinely overlooked by lazy thinkers who attribute a “bubble” to any market scenario defined by exuberance or – gasp – rising prices. In reality, there is no “bubble”. As I say in my new book The confusion of moneysuch a poorly thought out view assumes a buyers only market, or more ridiculously a market condition in which only the buyers are aware of the “bubble” so that the “biggest fools” are selling to informed buyers who are totally unaware that they sell low.
This all brings us to the Federal Reserve. As this column has been preaching for years and years, rumors of the Fed’s power to drive markets up or down by playing rates against outdated banks are grossly exaggerated. How we know it has to do with a crucial truth about dynamic economies: the future, by definition, does not look like the past, as past reflections knock the powers that be from their perches. The troglodyte notion of Fed interventions to support stock markets assumes that investors would encourage the central bank to freeze the present at the expense of a much better future. Google
Despite what seems like a no-brainer, there is a lingering view that Fed machinations are a catalyst for stock moves: Stocks in particular are believed to rise when the Fed cuts rates. Empirical realities mock conventional wisdom (see the huge Fed rate cuts of 2001, 2008, and 2020, among others), but the view persists that since investors believe the Fed is powerful, then it is.
What is the frequent comment to yours truly: maybe it’s true that the power of the Fed is exaggerated, but it doesn’t really matter. Investors think the Fed very relevant to the markets, and so it is. Ok, but not so fast. See above.
If it’s true that investors follow the stocks (try not to laugh) of people like Ben Bernanke, Janet Yellen and Jerome Powell to know when to buy stocks, who are they buying stocks from? Aren’t those who sell to them investors? This is important given what “everyone knows” about investors who think the Fed is able to turn bull markets on and off by playing rates.
Moreover, are we really to believe in the continuation of such staggering information asymmetry, where there would be abundant and utterly ignorant sellers, always eager to sell stocks to buyers only aware of the Fed’s ability to drive up stock prices with rate cuts? If “everyone knows” that the Fed can run bull markets with rate cuts, then why is there selling amid rate cuts? If the correlation is evident, wouldn’t stock market trading volume plummet amid falling rates as savvy investors hold tight to their stocks?
The questions are once again a reminder of the basic truth that the power of the Fed to move the price of anything is way overrated. This is first and foremost the case because there is no seller’s or buyer’s market, but it is also true because there are markets. Think about it.
In reality, markets, as markets, include the passions of bulls, bears, and the sentiment in between. Which tells us what is true: that there is no majority opinion that blind intervention by economists is fooling incredibly deep and informed stock markets, but there are probably a few fools out there who believe what is. so empirically and logically ridiculous.