During the 2008 financial crisis, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson approached President George W. Bush and said: If we don’t do something, this country will experience an economic downturn worse than the Great Depression of the 1930s.
President Bush explained that part of his job was to surround himself with smart people and trust their judgment. He considered Bernanke, Paulson, and their respective organizations as having some of the strongest financial minds out there. He trusted their decisions and told them to do whatever they felt was necessary to avoid an economic collapse.
When asked if he regretted any decisions made regarding TARP or other fiscal stimulus packages that he initiated, President Bush said no because those measures prevented a financial collapse. In addition, he did not want to go down in history as the President responsible for one of the greatest depressions of our time.
I had the privilege of hearing President Bush tell this riveting story first hand when I attended the SALT Conference in May 2011. It was part of a phenomenal interview conducted by CNBC anchor Melissa Lee. I mention this story now to bring up one simple point: Sometimes you have to make adjustments to your game plan based on certain market intangibles.
I am not trying to start a political or economic discussion. I am simply saying that the Fed’s ongoing injection of liquidity (whether you agree with it or not) is an intangible that you should consider when trading…and a force that should not be argued with. It’s no coincidence that since Operation “Twist” (a.k.a. QE3) began on October 4, 2011, the market has gone straight up with little pause. As the saying goes: Don’t fight the Fed!
Is the Fed doing all this to keep the economy afloat? To keep their jobs? To get the President re-elected? To prevent the stock market from crashing during their tenure? I have no idea. It’s probably a combination of all of the above.
The REAL question is: Will all this artificial “propping” of the markets lead to a potential disaster and/or hyperinflation in the future? Are world leaders simply “kicking the can” down the road and not working on a permanent solution? Does a permanent solution even exist? I don’t blame President Bush for not wanting to be in office during a potential depression, but is it safe to assume that ALL leaders will do the same thing going forward? It seems to me that no one wants to “go down in history” as having an economic meltdown occur under their watch. It also seems that when financial markets decline, global leaders are rushing to act in order to prevent further damage.
Some people say that it is better to act and do SOMETHING than do nothing and watch things fall apart. Others would argue: leave the markets alone and let them drop until REAL buyers step in. I somewhat agree, but the problem is the market might not stabilize until we correct 50% or more…and THAT would be devastating to our country AND the entire world.
As a trader, I prefer a REAL bull market, not one that is manufactured. The last TRUE uptrend I can remember was in 2003. THAT was a great market! Don’t get me wrong, I will still trade the uptrends such as the ones we had in 2009 and 2010, but I hate trading with the fear that once the government pulls the plug, the market might collapse. For example, when “they” went on vacation last summer (August 2011), the Dow dropped close to 2,000 points in a few weeks.
Again, I’m just a trader…so what do I know? I would prefer a REAL market with REAL stock setups and REAL leadership, but for now, we simply have to make adjustments based on the intangibles and take what the market gives us. It’s what keeps this game interesting, right? 🙂