No happy ending for the Fed’s stock party

Despite the economy limping along, the stock market has reached all-time highs. Recently, the stock market didn't react when Israel made a military strike on Syria. During any other period the stock market would have reacted very negatively to that event.

Last Updated: 11:51 PM, May 8, 2013
NY Post

Friends don’t let friends invest drunk.

I think that’s an apt warning, considering what’s been going on in the stock markets, which reached all-time highs this week even though the economy is — at best — limping along and may even be deteriorating.

William McChesney Martin was the head of the Federal Reserve Board from 1951 to 1970. Aside from overseeing a predominantly stable economy during his terms, Martin’s most lasting accomplishment was his comment that it is the job of the Fed “to take away the punch bowl just as the party gets going.”

Martin died in 1998, and so it’s a little late to get his opinion of what’s going on today. I may be a poor substitute, but I’m going to give you my view anyway: Not only has the punch bowl been left out too long, but investors are already swinging from the chandeliers.

Just take a look at the way Wall Street didn’t react this week when Israel made a military strike on Syria. Without getting into the politics of that situation, the fact is that the stock market during any other period would have reacted very negatively to that event.

This time — nothing.

Why? Because the people who control the stock market — professional traders who use computer models rather than fundamental news — realize that the Federal Reserve is in a bind. In fact, the bind is so large that it could change the Fed’s mandate forever.

Current Fed Chairman Ben Bernanke has made no secret of the fact that he wanted stock prices to rise. He came to his job with a deep worry about deflation, i.e., the decline in asset values that hamstrings an economy.

So, after the financial crisis, Bernanke has kept his punch bowl full of historically low interest rates. But, for the most part, companies haven’t reacted positively by expanding businesses and hiring workers. And consumers who account for 70 percent of economic activity have been cautious.

The crucial housing industry has revived somewhat, but only lately and mostly because big-time investors have come along to scoop up thousands of homes at what they consider rock-bottom prices. The vast majority of Americans are still too frightened to make a commitment to homebuying with the job market so iffy.

That leaves stocks as the only major asset class left to appreciate, something that’s been happening nicely over the past few years. This year’s rally of 15 percent so far is thrilling and frightening all at once.

The pros figure that with so little else going well for it, the Fed will never be able to raise interest rates again.

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