Despite What You’re Told, There Are No ‘Bubbles’ and Certainly No ‘Fed Bubbles’

It was December of 1994. Mexico did as poorly run countries often do and devalued its peso. Currency devaluation is an obvious economic retardant for it first robbing the citizenry of the fruits of their work, only for its bitter fruits to be felt again via reduced investment that logically shrinks the quantity and quality of work.

1994 is mentioned simply because Washington Post columnist George Will had a meeting with soon-to-be Speaker of the House Newt Gingrich in December of that year, only for Gingrich to express fear about global market selloff sparked by ineptitude inside Mexico. Will calmly reminded Gingrich that if “everyone’s selling” then by definition “everyone’s buying.”

Will’s truth expressed to Gingrich is something routinely forgotten by the lazy in thought who ascribe “bubble” to any market scenario defined by exuberance, or – gasp – rising prices. In reality, there’s no such thing as a “bubble.” As I argue in my new book The Money Confusion, such a poorly thought-out viewpoint presumes a market of only buyers, or more laughably a market condition in which only the buyers are aware of the “bubble” such that the “greater fools” out there sell to informed buyers wholly unaware that they’re selling low.

All of which brings us to the Federal Reserve. As this column has been preaching for years and years, rumors of the Fed’s power to move markets up or down with rate fiddling vis-à-vis antiquated banks are wildly exaggerated. How we firstly know this has to do with a crucial truth about dynamic economies: the future by definition doesn’t resemble the past as former afterthoughts knock the powers-that-be off of their perches. The troglodytic notion about Fed interventions propping up equity markets presumes that investors would cheer the central bank freezing the present in place at the expense of a much better future. GoogleGOOG
the ten most valuable American companies in 2000, 2010, and 2015 to see just how foolish such a point-of-view is. Put bluntly, if the Fed could prop up markets, then there wouldn’t be markets to prop up.

Despite what is seemingly a statement of the obvious, there’s a persistent view out there that the Fed’s machinations are a catalyst for equity movements: it’s believed in particular that equities are rising when the Fed is reducing rates. Empirical realities mock the conventional wisdom (see huge Fed rate cuts in 2001, 2008, and 2020, among others), but the view persists that since investors believe the Fed powerful, then it is.

Which is the comment frequently directed at yours truly: maybe it’s true that the Fed’s power is overstated, but it doesn’t really matter. Investors think the Fed very relevant to markets, and therefore it is. Ok, but not so fast. See above.

If it’s true that investors follow the actions of (try not to laugh) people like Ben Bernanke, Janet Yellen and Jerome Powell for clues about when to buy equities, from whom are they buying equities from? Are those selling to them not investors? This is important given what “everyone knows” about investors believing the Fed capable of turning bull markets on and off through rate fiddling.

Furthermore, are we really to believe in a continuation of such staggering information asymmetry whereby there would be abundant and wholly clueless sellers still eager to unload shares to buyers uniquely aware of the Fed’s ability to boost equity prices with rate cuts? If “everyone knows” the Fed can engineer bull markets with rate cuts, then why is there any selling at all amid rate cuts? If the correlation is obvious, wouldn’t trading volume in equity markets collapse amid rate cutting as in-the-know investors hold tightly to their shares?

The questions are a reminder yet again of the basic truth that the Fed’s power to move the price of anything is well overstated. That’s the case first and foremost because there’s no such thing as a market of just sellers and similarly not one of buyers, but it’s also true precisely because there are markets. Think about it.

In reality, markets by virtue of being markets comprise the passions of the bulls, bears, and sentiment in between. Which tells us what’s true: that there’s no majority view that blind intervention by economists tricks incredibly deep and informed equity markets, but there are likely a few fools who believe what is so empirically and logically ridiculous.