The Fed Will Not Be Able to Work Any Miracles

Despite the wishes of many investors, stock markets will not continue to march onward to new highs. The massive growth of stock market indexes over the past few years had its roots in the Federal Reserve’s easy monetary policy that grew to enormous heights in the aftermath of the financial crisis. Cheap, readily available money inflated yet another stock bubble, with investor euphoria rising to new highs. In fact, while many professional investors are pulling their money out of markets, retail investors continue to pile in, seeing new highs and thinking that stocks will continue to grow. But they couldn’t be any more wrong, and they’ll suffer accordingly.

Wishful Thinking of Dow 40,000

Even some of those who understand the artificial nature of the current boom can’t help but be swept up in the euphoria. Unlike those of us who understand the monetary nature of the boom, these investors view things more in the vein of Keynes’ “animal spirits.” With “irrational exuberance” acting to draw investors into markets, they see a correction occurring before the Dow makes its way upwards to 40,000 points over the next few years. But in reality it’s far more likely that the Dow will hit 14,000 in the coming years than 40,000.

The Fed Doesn’t Want to Keep Easing

Stock market growth over the past decade has corresponded almost perfectly to the Federal Reserve’s monetary policy. The correlation between the M2 money supply (the broadest measure we still have today) and the Dow Jones Industrial Average since the 2008 financial crisis is 96.6%. That’s about as strong a correlation as you can expect to find in financial markets.

And with the publication of the minutes from September’s FOMC meeting in which the Fed stated that “further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent,” it is clear that the Fed will continue to raise interest rates and move away from its extraordinarily accommodative monetary policy.

The Fed Can’t Keep Easing

The Fed knows that the bubble it has created is unsustainable and will end in spectacular fashion. That’s another reason the Fed continues to hike rates, so that it will have some breathing room to lower rates again once the crash comes. But with rates still at historically low levels, the Fed will have to continue to hike to get that breathing room. As rates rise, money supply growth will slow, and stock markets will slide.

Those who keep hoping that stocks will continue to rise aren’t looking at the reasons for stock markets’ huge increase in growth. Because they don’t know why markets were rising, they don’t know that they’re about to fall, and they’ll feel the pain of that fall acutely. Don’t let yourself be one of those people.

Take the cue from what markets are doing and diversify your portfolio before it’s too late. Stocks are declining and gold is surging because more and more investors want to get into gold to protect their hard-earned assets. Gold has protected investors for centuries and will continue to do so into the future. Now’s the time to put it to work for you.