Rationing Rational Rationalizations

What is the Greenspan or Fed put? It is an idea, the legend that says the US central bank will only allow a little downside in stocks. The 1929 crash despite being so long ago has been indelibly imprinted upon the machinations of policymakers. Some say they can’t see a big slide without the Great Depression.

Therefore, they will do anything and everything to prevent a market crash; up to and including, pace 2002 Bernanke, using the “printing press”. Since money goes into stocks, a la 1929, monetary policy is a key factor in stock price bulges.

Almost none of that is true, however. The only part that is correct is the FOMC’s fixation on the S&P 500. They talk about the market all the time, but more as an information tool than anything else. Since bubbles, they’ve noticed stretched valuations but more often than not they are rather pleased with what they think exuberant share prices say about their own work.

It’s circular reasoning at its worst; stock prices are up because the economy is doing well, and we know the economy is doing well because stock prices are up. Congratulations [insert the name of the current Chairman here]!

The links between money and the floor of the NYSE were severed a very, very long time ago just after the Great Crash (there is no such thing as call money anymore). While the image of 1929 lingers ever onward in our collected fears, the Crash of ’87 is by sharp contrast a minor footnote for a reason.

In the 401k era, equities are a portfolio class that is built up and nurtured by personal savings. In the 21st century, share prices are pushed further by another form of savings, corporate profits deployed via repurchases.

The Greenspan put nowadays is better classified as the CEO-pay put.

In truth, there is more Keynes than Bernanke or Powell at work. John Maynard once said markets can stay irrational longer than you can stay solvent. That’s not quite right, though, not in this modern context. Markets can rationalize longer than you can solvent, often doing so in large part because of this one myth.

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Gary Anderson 3 months ago Contributor's comment

If the only thing that matters is GDP, (NGDP which is growth plus inflation), then the question is how fast is it slowing? It will almost surely slow without a tariff deal. The US thinks it can win without a deal. Investors are telling us that is not true.