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Sunday, December 22, 2013

Wall Street Continues Celebrating

The Fed’s recent “tapering” policy does nothing to control or deflate the stock market bubble.  While latest quantitative easing policy will reduce monthly purchases of longer-term Treasuries and mortgage securities from $85 billion per month to $75 billion, the Fed vows to keep short term rates near zero throughout 2014, and possibly longer.

It’s the availability of essentially unlimited amounts of short-term funding for the stock market carry trade that fuels the bull market in stocks, in the face of the highest ratio on record of negative earnings outlooks issued by corporations.  Carry trade, as you may know, means the ability to borrow short-term at very low interest rates and to invest long-term in assets such as stocks listed on the exchanges.  The Fed’s continued “Greenspan Put” emboldens hedge funds and other speculators secure in the knowledge that the Fed won’t pull the punch bowl away and leave them squeezed by higher costs of borrowed funds.