A few months later Chairman Ben gave his Fed credit for the 30% rise in the Russell 2000 that occurred after he announced QE2 in August 2011. The thinking in Washington is that a rising stock market will give investors the perception that the economy is improving and cause them to make future investments. Instead of the stock market being a reflection of investor sentiment, they have been manipulating the stock market to actively manage investor sentiment.
What the Fed seems powerless to manage is the rampant corruption on Wall Street as evidenced by MF Global, PFG Best, the disastrous Facebook IPO, the Libor scandal, etc. Every dollar of stock market stimulus spent by the Fed is followed by two dollars of stock market withdrawals by horribly burned investors. So despite record amounts of centrally planned stimulus, except for a few select indexes and sectors most of the foreign and domestic markets have gone nowhere for the past two years.
As the government debt to GDP ratio hit 100%, printing and quantitative easing gave way to jawboning. It is my firm belief that maintaining the US Dollar's reserve currency status is a ultimately a much higher priority in Washington than the S&P 500. The US military is the largest consumer of fuel on the planet, and the armed forces cannot purchase gasoline with shares of Facebook. And like ordinary civilian consumers the military has a fuel budget that cannot be exceeded, so if Ben's printing got too out of hand to the point where gas went to $5 a gallon, the Army, Navy and Air Force would have been forced to make cutbacks in enlistment or equipment to keep their budgets balanced.
To me the key chart continues to be the year over year percent change in the M2 money supply. During the prior two market crashes annual growth in M2 continued upward to the 10% level even as markets headed lower. Now we're in a situation where M2 growth has already hit the 10% level and started to turn lower. This tells me that the Fed is going back to its original responsibility of taking away the punch bowl so that when World War 3 starts and military fuel consumption goes wild our fighting forces will not be restrained in any way by pain at the pump.
M2 MONEY STOCK & DJIA
HOUSEHOLD NET WORTH & DJIA
TOTAL NONFARM EMPLOYEES & DJIA
INDUSTRIAL PRODUCTION & DJIA
DURABLE GOODS & DJIA
CONSTRUCTION SPENDING & DJIA