I think you're right. FED has gradually understood that the stock market is equivalent to the bond market of the past. The financing in this era is equity more than debt. This has had the undesirable effect of driving stock prices to unsustainable excess because there is such demand for equity funds to grow the tech infrastructure. When the funds are not nominally available, the trick has been to inflate the funds that are, in order to widen the apparent supply.
FED made a major mistake last October by encouraging this process and now the reality is diverging from the price. That is, the work of money flow into the market is falling, but price is steady or rising. Most sectors of the market are already in strong downtrends even though they may be receiving net inflows. When the COMPQX goes which will be soon, the bear will come growling out of the underbrush and stand up. The bear is the most fierce of all animals and eats lions alive, and this bear is hungry.
You suggest the FED wants stock prices adjusted down, but they know they don't need to do much on that front. They will try to talk it down a bit, but they can't take overt measures. The FED can't increase margin requirements or take other drastic action because the stock market is far more volatile than the bond market ever was. If they push too hard, they could precipitate what they fear the most:crash. If the market starts down hard, FED will be in doing coupon passes trying to short cover it back up.
Consider all that new liquidity. There is a limit to what they can do, but if push comes to shove, they will ignore the limit regardless of what inflationary implications that entails. To them, crash is worse than inflation and bigger crash, because they believe they will have time to manipulate the system during the interim.
If the DOW opened down 2000 points, there would be intense gold contract short covering by mining companies and CBs would postpone all gold sales. Suddenly there would be a squeeze on gold and silver supplies. You can't trade that possibility. You have to be there already to benefit if it occurs. |
