In Defense Of Powell's Restoration Of Price Discovery

Relying on fakery and addictive stimulus is the acme of fragility and vulnerability.

Let's start with a chart of the S&P 500:

Having become addicted to the Federal Reserve's nearly free money for financiers and the infamous Fed Put, stock market players are now weeping and thrashing about in the agony of withdrawal as Fed chair Jay Powell has instituted a cold-turkey withdrawal from the financial stimulus of the Bernanke-Yellen days.

Let's be clear: the policies of nearly free money for financiers (QE) and the Fed Put were unmitigated disasters, as they distorted financial markets so severely that the markets' pricing mechanisms have been crippled.

The policies of the Bernanke-Yellen Fed also directly exacerbated wealth-income inequality, as the wealth effect of rising equity valuations-- the supposed goal of monetary stimulus-- only benefited the top 5%, and most of the gains flowed to the top 0.1%.

Stripped of addictive stimulus and the backstop of the Bernanke-Yellen Fed Put, the markets are experiencing the pain of withdrawal and the traumatic return of price discovery. Although we're taught that capital has financial, intellectual and social forms, trust is also a form of capital, and thanks to the gross distortions and perverse incentives of the Bernanke-Yellen Fed, nobody trusts the market's price discovery mechanisms any more.

This is why market participants are so skittish and so easily panicked: they have no way of knowing what market valuations will be once the markets get through cold-turkey withdrawal from Fed smack and start discovering price via supply, demand, risk, cost of credit, discounting future cash flows, etc.--all the market mechanisms of transparent price discovery.

In effect, the Bernanke-Yellen Fed institutionalized the destruction of trust in U.S. markets in the pursuit of continued gains in equity valuations. Nobody trusted markets' price discovery, but they trusted the Fed to bail out the stock market should any latent price discovery take markets lower.

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Disclosures: None.

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