The Dow Jones Industrial Average made a new all time high yesterday, hitting 14,253.77. Analysts on CNBC, Bloomberg and Fox Business News were cheering the run. A common question posed to members of the media and stock market analysts was whether the markets could continue to keep going higher, indefinitely. The majority said, ‘yes’. When asked for the reasoning behind it, the main point was not valuations or technical analysis, it was purely “The Federal Reserve has backstopped this market. They started doing it in 2009 and will keep doing it for the foreseeable future. Therefore the markets will not go down.
This is probably one of the most scary statements ever made. To believe an entity, an independent bank, run by a group of men will never make a mistake is almost laughable. In history, the Federal Reserve has been responsible for every major bubble created. What makes them invincible now?
To give an example of the Federal Reserve creating the last major bubble, look at the Financial Collapse and Real Estate Bubble. This was created simply because of Federal Reserve intervention following the Technology Bubble collapse. To help the economy weather the massive technology collapse, the Federal Reserve lowered interest rates dramatically and encouraged the borrowing of money. This helped drive up home prices exponentially and encouraged the banks to take risky bets.
While I do believe the markets will continue to head higher in the near term, I think anyone believing the markets can never drop because the Federal Reserve will always be there to prop it up is smoking crack. They will and are causing the next big bubble. As the analysts and media pump this Federal Reserve safety net, the little investor is sure to go all in and be hurt the most. Sad but true. No entity run by a human being is ever infallible, especially an entity that has been wrong so many times in the past.
Related: SPDR S&P 500 ETF Trust (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).