Financial Post: Don't Fight the Fed? Why Investors Should Be Wary of Market Manipulation

June 18, 2020

Article by David Rosenberg in Financial Post

All I hear over and over again is, “Don’t fight the Fed!” It has become the most overused refrain in the business. Yes, yes, the legendary Marty Zweig is said to have come up with that glib remark, but it was in the context of buying into an undervalued and oversold market when the U.S. Federal Reserve was pumping the system with liquidity in the latter stages of a recession.

What we have now is nothing short of market manipulation. Reducing the cost of overnight funds is one thing. Extending the intervention to Treasuries or high-quality securities is something we became accustomed to in the aftermath of the last Great Recession. That’s when the Fed became a duration bond manager.

But the central bank is now becoming a hedge fund. Adding low-quality corporate credits to its balance sheet is a whole different game: keeping zombie companies alive, rendering fundamental analysis and price discovery obsolete, and leading to a complete misallocation of resources.

Capitalism has taken a semi-permanent vacation. AWOL. And what it means for the future of society, to be running such reckless and feckless fiscal and monetary policies, is troublesome to say the least.

That is, if you believe in the famous Larry Kudlow thematic of “private sector capitalism.” Actions built on such collective guilt at the government level have created moral hazard beyond belief, blowing a massive hole in the fiscal purse and jeopardizing the sanctity of the central bank balance sheet. There is zero chance this ends well. Societies that run their policies on such guilt truly are doomed, and that is what historians will be writing about in the future.

This market is rigged, pure and simple. So why shouldn’t equities command the richest multiples since the dotcom bubble of two decades ago?

But just remember that the bubble came crashing down, and there was nothing the Fed could do about it. Fighting the Fed from late 2000 to the fall of 2002 was probably ...

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