The Fed Unwinding

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Back in August I told everyone what to expect out of the long anticipated fall stock market weakness.

http://quillian.net/blog/the-fall-stock-market-crash/ (for review)

Everything I predicted has happened. I am not that good of a short term trader. The fact that it is all unfolding exactly as I said it would is confirmation that the stock market is being purposefully managed. Lets call it intelligent design. I am not looking at numbers. This is all about understanding human behavior and focusing on incentives.

August was full of negative research reports warning of a coming crash. Lately even Goldman Sachs has been making bearish predictions. The only reasons for bearish reports is to draw in short sellers. Shorts on the books are an indispensable ingredient for maintaining an uptrend.

Here is what to expect for the foreseeable future. The Federal Reserve is unwinding its balance sheet. That means stocks will fall, right? No! The total balance sheet will shrink.  As the unwinding takes place stocks will be purchased as bonds are sold. It won’t be dollar for dollar. If there are not enough shorts to squeeze and the public quits buying, the Fed will buy enough to try and manage a controlled correction.

You will read this same thing other places and you may already have. People absolutely know the financial markets are seriously manipulated but they still trade as if normal market influences are in control. Even huge hedge funds and professionals say one thing and trade according to ancient dogma that applies to free markets. This makes it very easy to manipulate prices. Markets do not change directions with huge and sudden shifts in supply coming on the market. Markets generally top out when supply barely exceeds demand. Momentum takes a while to build. To keep an uptrend in tact it is only necessary to absorb a small number of shares. If enough short positions are on the books, no supply need be accumulated at all.

Again, don’t expect a market crash any time soon. All of the world’s central banks are in cooperation. Friends of the Fed are always available to carry their water and will be as long as the Fed can guarantee their profits.

The Federal Reserve is an integrity free institution. Understand that while many at the top are being richly rewarded, the economy is being destroyed from the bottom up. Chances are that the market will continue to be stable until serious damage to corporate profits can no longer be hidden or explained away.

 

About Fantasy Free Economics

James Quillian is an independent scholar and economist.

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