Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18
Why You Should Brace Yourself for Big Financial Changes - 11th Jun 18
Inflation to Skyrocket When Fed Reverts to New QE & Interest Rate Cuts - 11th Jun 18
Stock Market Topping Pattern or Just Consolidation? - 11th Jun 18
Study: What Happens Next to Stocks When the Put/Call Ratio is Very Low - 11th Jun 18
G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - 11th Jun 18
SPX Unshackled - 11th Jun 18
When Trump Met Fibonacci And Won - 11th Jun 18
FREE Theme Park Entry with Cadbury's Choc's! Legoland, Alton Towers, Chessington.... - 11th Jun 18
Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - 10th Jun 18
End of the World Stock Market Chart! - 10th Jun 18
All US Homes Are Overvalued - 10th Jun 18
Thorpe Theme Park London Car Park Exit Nightmare - Drivers Beware! - 10th Jun 18
Gold Price Summer Doldrums - 9th Jun 18
How to Prepare for Economic Uncertainty with Gold and Silver - 9th Jun 18
5 "Tells" that the Stock Markets Are About to Reverse - 9th Jun 18
Billionaire Schools Teacher in NAFTA Trade Talks - 9th Jun 18
Land Rover Discovery Sport ECO Mode Real World Driving MPG Fuel Economy - 9th Jun 18
Crude Oil Bullish Weekly Reversal vs. Bearish Monthly Reversal - 8th Jun 18
Fed’s Interest Rate Hike is Short term Bearish for Stocks - 8th Jun 18
The Deviant Conundrum Called Silver - 8th Jun 18
Pleasure Island Theme Park Cleethorpes, Last Day Trip Before it Closed Down - 8th Jun 18
America’s One-sided Domestic Financial War - 8th Jun 18
Debt Consolidation Advice: When and Why to Consolidate - 8th Jun 18
Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - 8th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

How the Fed Creates Stocks Bull and Bear Markets

Stock-Markets / Liquidity Bubble May 02, 2013 - 08:28 AM GMT

By: Clif_Droke

Stock-Markets

Bull and bear markets don't just happen - they're created by the Federal Reserve. While few investors dispute the power that Fed interest rate policy has on the market, the extent to which it influences the direction of stock prices in both directions is often downplayed. Moreover, the health of the economy is often decided by the Fed's interest rate policy.


While it's no secret that loose monetary policy on the Fed's part benefits stocks and can lead to credit bubbles, researchers tend to underestimate the effect tight money policy has in creating market crashes and economic recessions. Restrictive money policy on the Fed's part has frequently led to falling stock prices. The extent and duration of the monetary tightness is what determines the severity of the bear market. The longer the Fed restricts money, the more severe the downturn will be.

Consider the bear market of 1973-74. The Dow Jones Industrial Average experienced a decline of 40 percent, which at the time was the worst bear market since the Great Depression. The Dow peaked in early 1973 at an all-time high of 1150 before commencing a Chinese water torture type decline for the next two years. The decline was precipitated by tight money on the part of the Fed, which began raising interest rates in early 1972.

Fed Funds Rate Chart 1972-1976

It wasn't until mid 1974 that the Fed began lowering rates and loosening money. Although it took about six months to have the desired effect, by 1975 the Dow launched a recovery rally which by early 1976 had completely retraced the decline of 1973-74.

The next major crash was of course the October 1987 stock market crash which witnessed a 1-day drop of 22% in the Dow. Not surprisingly, the October '87 crash was preceded by a rising fed funds interest rate in the year prior to the crash. The effective rate rose from approximately 5.8 percent a year before the crash to around 7.3 percent at the time of the crash.

Fed Funds Rate Chart 1986-1988

By far the most egregious example of the Fed abusing its power to engineer a financial debacle occurred in the period between 2004 and 2007. This was the 3-year period that transitioned into the credit crisis of 2007-2009. The Federal Reserve under the chairmanship of Alan Greenspan raised the interest rate from 1 percent in 2004 to just over 5 percent in 2006. Rates were then left at this level for another year before being reduced. By that time, however, the damage had been done and it was too little, too late.

Fed Funds Rate Chart 2004-2008

The interest rate hike of 2004-2006 could not have occurred at a worse time, for the financial market and the economy of those years were predicated on a real estate boom that was dependent on low interest rates. By raising the fed funds rate as many times as he did, Greenspan essentially sealed the doom of the U.S. economy and stock market.

There are some economists who overestimate the effect of loose money and credit in creating market crashes. While they correctly identify loose monetary policy as a prime contributor to a financial market bubble, they ignore the devastating impact of a subsequent tight money policy. Loose money doesn't cause a market crash by itself; it's the combination of loose money followed by tight money and credit conditions which serves as the catalyst for a crash.

There is an "X-factor" to all of this, however. While there is no sign of monetary policy tightness on the Fed's part, there is what might be called "policy tightness" by the world's leading governments, including the U.S. Congress. Fiscal austerity current reigns supreme among U.S. and European governments and it could eventually prove detrimental to the Fed's efforts at continuously flooding the system with liquidity. As Dr. Scott Brown of Raymond James has said, fiscal tightness amounts to a "self-inflicted restraint on growth" and that amounts to "very bad economic policy." It also explains why, despite record levels of liquidity, the economy has been able only to tread water in recent years while financial markets have soared to new heights.

Could it be that austerity will ultimately prove to be the catalyst that kills the recovery? The question remains unanswered but with the downward pressure exerted by next year's 120-year Kress cycle bottom, a failure of Congress and other governments to admit that austerity has been a failure could prove fatal.

2014: America's Date With Destiny

Take a journey into the future with me as we discover what the future may unfold in the fateful period leading up to - and following - the 120-year cycle bottom in late 2014.

Picking up where I left off in my previous work, The Stock Market Cycles, I expand on the Kress cycle narrative and explain how the 120-year Mega cycle influences the market, the economy and other aspects of American life and culture. My latest book, 2014: America's Date With Destiny, examines the most vital issues facing America and the global economy in the 2-3 years ahead.

The new book explains that the credit crisis of 2008 was merely the prelude in an intensifying global credit storm. If the basis for my prediction continue true to form - namely the long-term Kress cycles - the worst part of the crisis lies ahead in the year 2014. The book is now available for sale at: http://www.clifdroke.com/books/destiny.html

Order today to receive your autographed copy and a FREE 1-month trial subscription to the Gold & Silver Stock Report newsletter.

By Clif Droke

www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules