The Game Stop Fairy Tale And Its Lesson

Essentially, by manipulating the perception of risk, the Fed hides its true cost, spurring reckless behavior

In January 2021, we wrote The Fed is Juicing Stocks. In the article, we lay out four ways in which the Fed drives stock prices higher and reduces risk perception.

Powell’s Take On GME et al

Jerome Powell’s first question at the FOMC meeting on January 27, 2021, was about GME. He responded:

“If you look at what’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy. The connection between low interest rates and asset values is probably something that’s not as tight as people think.”

Mr. Powell is smart enough to see the casino environment he has fostered. While he may tell bold lies and deny culpability, he must concern himself with consequences. Powell knows, as well as his advisors at the Fed and Wall Street, periods like today, with excessive speculation, never end well.

The harder they come, the harder they fall.” – Reggae Legend Jimmy Cliff

 

Summary

The Fed has changed the investment atmosphere. Today’s investors view markets as get rich quick schemes. Stories of investors turning thousands into hundreds of thousands litter social media. The problem is that such behavior is not natural nor sustainable. It relies on ever-growing amounts of monetary and fiscal stimulus, which are not sustainable.

There is another vital aspect. Capitalism provides better living standards for more people when it is most efficiently run. A core component of capitalism is how productively capital is used.  Ask yourself, is capital being deployed most productively?

The casino may stay open for a while longer, so enjoy it while it lasts. Make no mistake, the doors will close, and gamblers will be trapped.

This time is not different!

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