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A study by the Federal Reserve Bank of New York may validate what cynics like me have been saying for many years: statements and actions by the Federal Reserve are pumping up the stock market tremendously. The study looked at stock market action in the 24-hour period before the Fed's regular statement on interest rates and the economy; the Fed's open market committee makes eight such announcements a year. According to CNBC.com, the study found that the market has a tendency to rise in the 24-hour period before the release of that statement, presumably on expectations that the Fed planned to lower short term interest rates, buy long term bonds to drive down long rates, or take some similar action to dump more money into the economy. If you subtract those 24-hour periods, the Standard & Poor's 500 would be at 600, says the New York Fed. It closed Friday at 1356.78. So stocks would be down more than 50%.

Wall Street for decades has referred to the "Greenspan put" or the "Bernanke put" -- the Street's belief that the Federal Reserve would keep the stock market up. Some people will argue with this study: for example, I would say that stocks react to other Fed statements, and expectations of actions, such as by regional presidents, or by the chairman at times other than after the open market committee meetings. Chairman Ben Bernanke talks to Congress committees Tuesday and Wednesday, for example. If he wants to, he can make statements that will run up the market.

The Fed has mandates to hold down inflation and keep employment up. The Fed has no mandate to run up the stock market. The Greenspan put and the Bernanke put have had the effect of exacerbating the dangerous income and wealth inequality that is walloping the middle class, and thereby hurting the economy. The richest 10% and 1% overwhelmingly benefit from a stock runup. Others have small stakes, often indirect, in the stock market. The conclusion is obvious: Wall Street gains from Main Street's pain. The Fed would have no justification to lower rates if the economy were strong. Bad economic news is good Wall Street news.

There is one rationale the Fed might have for this policy. Example: The California State Teachers' Retirement System made a 1.8% profit on its investment in the just-ended fiscal year. Its official forecast is for 7.5% a year. Without the Fed talking about and instituting low interest rate policies, thus goosing stocks, think where pension funds, cities, and other institutions might be. So the Fed could argue that its manipulation of the stock market could actually fall under its mandate to keep unemployment lower.

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Don Bauder July 17, 2012 @ 7:53 a.m.

CALPERS DOES EVEN WORSE THAN TEACHERS' FUND. The California Public Employees' Retirement System (CalPERS) made only 1% in its last year, worse than the 1.8% reported by the California State Teachers' Retirement System (see above.) CalPERS shoots for 7.5% a year. Best, Don Bauder


Visduh July 18, 2012 @ 4:44 p.m.

Don, while I don't doubt the main thrust of your blog post in regard to monetary policy keeping stock valuations on life support, I would quibble in regard to those with a stake in the matter. You state that the richest 1% and 10% are overwhelming beneficiaries of the stock runup. Then you state, "Others have small stakes, often indirect, in the stock market." Inasmuch as pensions, public and private, are large holders of stocks (generally referred to as "institutions"), anyone with a retirement plan, whether in a defined benefit plan or in a 401(k) or some sort of annuity has a very large stake in this too. It may be indirect, but it is no less real and a major part of the retirement planning done by those employee. If their benefits are lost due to poor or negative investment returns, the person suffering the loss will think of it as a really big deal, and so he/she should! Proportionately, those stakes are huge for millions of Americans.


Don Bauder July 19, 2012 @ 9:46 p.m.

The number most often quoted is that 50% of Americans have a direct or indirect stake in the stock market. But overwhelmingly, the value of stocks resides with the upper 10%, upper 1% and upper fraction of 1%. I have given those estimates before, but I can't remember them and don't have time to look them up now. I think it's something like 80% of stock valuation is in the hands of the upper 10%. But that could be off.

Also, I want to reemphasize that this New York Fed study doesn't look quite right to me. Clearly, the direction is right: the market has been pushed up by liquidity and hints of coming liquidity. Observe: we had the biggest downturn since the Great Depression and the weakest recovery since then, and stocks have doubled. Overall, at this time, by and large, stocks are inversely related to the performance of the economy. However, the liquidity expectations have not just come in the periods before open market committee meetings. Stocks have soared every time Europe has come up with some kind of plan to save Greece or Spain or some other country. Look at this week, Bernanke ran the market up by what he said to Congress; that wasn't prior to an open market committee meeting. I have raised my own portfolio to 35% stocks because I think the economy is going to be weak for several years, and world central banks will continue pumping out liquidity. However, one thing that worries me at night is 2013; it could be another 2008, and the market may not respond to hints of and actual creation of liquidity. Best, Don Bauder


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