There's a very dangerous meme making the rounds.
It goes something like this:
The economy is improving, therefore the Fed's going to taper… and, when it does, the economy is strong enough to endure the withdrawals that will come with it.
Don't fall for it.
Nothing could be farther from the truth. Any amount of stimulus reduction will indeed trigger a "taper tantrum."
This chart is all the proof we need…
How the Fed Directly Impacts Your Money
The following chart is courtesy of Michael Cembalest, Chairman of Market Strategy and Investment Strategy for JPMorgan Asset Management via Forbes.
You can see as clearly as I can that 100% of equity market gains since January 2009 have taken place during weeks when the Fed has purchased Treasury bonds and mortgages. Conversely, 100% of the declines have been during weeks when the Fed backed off.
Now, I'll parody screen legend Jack Nicholson's iconic line in "A Few Good Men"… some people can't handle the truth. So they argue that this is a short-term phenomenon or just random happenstance.
That's not true either.
Andreas Calianos, Chief Investment Officer at DomeEquities, did some truly great work in this department that's very similar to my own analysis, which is why I want to share it with you.
Calianos found that the correlation between the S&P 500 and the average weekly dollar value of Fed-held securities from December 2003 to the week ended March 6, 2009, was a low 0.57. That's little better than random.
But from March 2009 onward, the correlation jumped from 0.57 all the way to 0.93 – meaning that there's nearly a 1 to 1 correlation between the weekly average dollar value of securities held by the Fed and equity prices.
If you've forgotten your basic statistics, 1 represents a perfect correlation, whereas a 0 means there's no correlation and the data doesn't seem to be related at all. But, again, we're talking about a correlation coefficient of 0.93, which is nearly perfect.
Ergo… you truly can thank Team Bernanke and the Fed for the $14 trillion 155% rally we've enjoyed for the past 5 years. While correlation isn't causation, you can bet there's linkage in this case thanks to the effect of liquidity that the Fed's buying has created.
So what's next?
That's hard to say, but if you thought 2008 was fun, stay tuned. I don't know when the next shoe will drop, but when it does it's going to be a doozy.
Legendary investor Jim Rogers puts it this way – and I am paraphrasing here – in several recent interviews that the reason why things will get so much worse the next time around is the amount of debt they've put into the system. Central bankers continue to float literally everything in an artificial sea of liquidity.
It's not for nothing that he's quick to remind people that the United States is now the most indebted nation in the history of the world – a point long-time readers know I am prone to hammer on as well because the Fed's activities are magnifying the causes of market instability rather than addressing the fundamental sources of the chaos that created it.
History is filled with examples of false booms where low interest rates create the illusion of savings that doesn't exist and that consumption is healthy when, in fact, it isn't. The Great Depression comes to mind, as does the tulip mania of the 1600s, when European coinage debasement created a continent-wide run on other assets. This should ring some bells if you've ever read Charles Mackay's book, Extraordinary Popular Delusions and the Madness of Crowds. If you haven't, I urge you to read it because it will help put what I am saying into perspective. Bear in mind that it was first published in 1841.
My position is basically this… the notion that our economy is strong enough to support a taper is very, very dangerous.
It's creating a sense of false security amongst market participants who can least afford it while quite literally giving the biggest trading houses yet another "get out of jail free" card for still further derivatives speculation – and yet another chance to fleece the public.
Here's What to Do as We Head into 2014
First, watch the central banks carefully.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.