Central Banks Are Pumping Up Stocks; How Long Can It Last?

Those peddling the narrative that the US economy is great keep pointing to the stock market. Indeed, stocks have continued to push higher, setting records along the way. But Peter Schiff has been saying that stocks aren’t being driven higher by a great economy. In a recent interview on RT Boom Bust, Peter said that if you look at the economic fundamentals, stocks should be coming down.

The only thing really supporting it is the Federal Reserve and all the money they’re printing with their stealth QE program, although it’s not stealth really. Everybody knows they’re doing it. They just refuse to admit it. But there’re no earnings behind this. There’s no strong economy behind this. This is an inflation-driven bubble, but the air should be coming out.”

A recent article at MarketWatch makes the same point.

Since the Fed launched quantitative easing last fall, the stock market has marched up in lockstep with the Fed’s balance sheet.

It’s hard to avoid the conclusion that there is a direct correlation between the Fed injecting liquidity into the financial system and the precipitous rise in stock prices. As the MarketWatch article puts it, “The conclusion is unmistakable that the money the Fed is printing is going into stocks, especially in large-cap stocks such as Apple, Amazon and Microsoft.”

Interestingly, the People’s Bank of China announced it would inject a massive amount of liquidity to the tune of $1.2 trillion into the Chinese financial system, hoping to prop up the stock market in the midst of the coronavirus scare. Chinese stocks tanked anyway, but the MarketWatch article contends that the extra liquidity pumped into the system by the Chinese central bank has helped prop US stock prices up. While US stocks did take a big hit last week, they did not drop below a technical support zone.

In theory, the stock market should have fallen to the support zone on the news of the coronavirus. But the stock market has held up because of the general belief that central banks will print more money or engage in other ways to inject liquidity in the markets.”

The question is how long can central banks keep stock moving up? How long can they keep pumping air into the bubble?

As one analyst told CNBC, “the marketplace believes that liquidity can decouple us from fundamentals for a very long time.”

But eventually, economic fundamentals always catch up. And as Peter has pointed out, this notion that the US is enjoying the greatest economy in history is nonsense.

The Fed and other central banks around the world have turned extreme monetary policy into the new normal. In an interview with Daniela Cambone of Kitco News, Peter said the Fed is on a very disruptive course of action. It will keep printing money and keep interest rates artificially low.

Because they’re afraid of the consequences of what they’ve already done. So, instead of dealing with those consequences, they want to kick the can down the road by making the consequences even worse, which is what they’ve done by lowering rates again and going back to quantitative easing.”

Eventually, the markets are going to figure out that QE is indefinite and rates are never going to normalize. When that happens, the bottom will drop out of the dollar and gold is going to go through the roof.