Friday, October 19, 2012

Don't Fight The Fed?

"Don't fight the Fed" is an investment maxim meaning that it's probably a bad idea to be selling stocks when a central bank is pumping money into the economy. Is it true? Well, over the last two years, we've seen the Fed and ECB print money like madmen, monetizing government debt at huge levels. in the US, the Fed's money printing represents a huge percentage of overall government receipts, itself worthy of a blog post.

In this environment, you'd expect to see the markets shooting skyward, or at least making a nice, long bull run. Here's what's really happened.

France's CAC40 over the last 2 years.

Spain's IBEX 35 over the last 2 years.

America's S&P 500 over the last 2 years.
It turns out that you can't fight the Fed until you can. I think if you looked at these charts with only the basic knowledge that the respective central banks are flooding the market with money, you'd conclude that something is fundamentally wrong in Europe. You'd also conclude that things are working more or less as expected in the US.

More basically, this shows that even advanced, first-world nations can eventually spend and regulate themselves into ruin. Europe has so crippled themselves with government interventions in the marketplace that they no longer respond properly to the most basic of stimuli - money dropped from helicopters. Again, just using this information, you'd have to conclude that there is something foundationally wrong with Europe.

Sadly, we're not seeing much indication that the Europeans have noticed this. Instead, they're marching the protesting for yet more government spending and intervention.


W.C. Varones said...

Europe is obviously not printing enough.

Expect that to change.

Doo Doo Econ said...

I heard some EuroConomist say tha they can print as much money as they like without fear of inflation. It was on an show called "The Pulse."

K T Cat said...

Thanks for the comments, guys! It's pretty telling that the money printing isn't doing any more than slowing the descent right now.

Inflation? It would be a real surprise if it didn't come.