Terry McCrann: No end to Wall Street’s free money party

What happens to Australian shares is totally dependent on what happens on Wall St and what happens over there is totally dependent on what the Fed does.

The bottom line is a reaffirmation from Fed head Powell that he will do everything to keep money flowing into the Wall St party. Photo: AFP

What happens on the Australian share market is totally dependent on what happens on Wall St and what happens over there is totally dependent on what the Fed does and what it promises to do.

That is, until it all blows up – like it did in 2008 with the Global Financial Crisis, and again last year when the virus struck.

In both cases the Fed then got to work, cutting interest rates to zero and printing trillions of dollars; seemingly making everything “right”.

Wall St, our market, share markets all around the world zoomed straight back up; in Wall St’s case going well beyond its pre-plunge highs.

Whether all we’ve done, led by the Fed, has just been to really only kick the can down the road, is obviously the big question. But so far, the can has been so kicked for more than 12 years now.

Overnight Friday, Fed head Jerome Powell, gave a speech, which at core committed to keep can-kicking at least into and through 2022.

The Fed’s massive stimulus program continues to drive Wall Street. (Photo by Johannes EISELE / AFP)

The greediest people on the planet, residents of New York, New York, said thank you very much and took Wall St to yet another all-time high.

Now, the supposedly absolutely core job of the Fed – the Federal Reserve, their version of our Reserve Bank – is to keep inflation not just “under control” but around 2 per cent a year.

This year, US inflation has burst well above 2 per cent. Indeed, in a single month it’s gone as high as 0.9 per cent – that’s to say, almost half the inflation supposed to be allowed for a whole year in a single month.

Over the three months to June, US inflation was 2.3 per cent – more than what’s supposed to be allowed for a whole year; indeed, a full-year annualised rate of close to 10 per cent.

Over the 12 months to July it’s totalled 5.4 per cent. But in the seven months of the year so far it’s already reached 4.2 per cent; an annualised rate close to 8 per cent.

Powell’s response has been two-fold; and he spelt it all out again in great detail in his latest speech.

First, he’s dismissed the inflation as “temporary”; in effect, that in a month or two – or ten or twenty – it will all evaporate. So if the Fed does nothing, it will seamlessly go back to 2 per cent or so.

So it would be a mistake to raise interest rates and stop printing money to fight this “temporary inflation”. It would generate unnecessary pain in both the US economy and on Wall St.

US Federal Reserve Chairman Jerome Powell. (Photo: AFP)

I don’t want to get into deep discussion of economic theory and monetary policy; just to necessarily note the breathtaking stupidity that underlies that thinking.

Yes, that would be valid in a world where the Fed’s official rate was at a normal 3-4 per cent, in a relatively normal world. It would be bad policy to raise from that level to fight temporary inflation.

But we are talking about the reality of rates at a totally UN-normal zero and massive money printing. It’s the fundamental corruptions that has unleashed – captured in the ludicrously high share and property prices, now interfacing with higher inflation.

This leads into the second rationalisation from Powell for “not seeing” the higher inflation. That the Fed is now also chasing maximum jobs.

So, unless and until they get those “more jobs”, he won’t be doing anything to dampen down on rising inflation, especially as he doesn’t actually see any “rising inflation” because it’s only “temporary”, unless and until those “more jobs” arrive.

Then it won’t be temporary, and then and only then would the Fed start raising rates; although it might – it intends? hopes? – to be cutting back on the money printing progressively before then.

The circularity of the thinking would make a contortionist or python go green with envy; and it’s mixed with a spinelessness that plays out in bending and backtracking anyway, anytime Wall St gets the jitters and throws a temper tantrum.

So, that’s all very well – the games being played on the other side of the Pacific; but what does it mean for an Australian investor?

The bottom line is a reaffirmation from Fed head Powell that he will do everything to keep the free-money booze flowing into the Wall St party.

Indeed, even more basically, he doesn’t yet see any need to even begin to think about cutting back on the free-money booze.

Broadly, Wall St will keep tracking higher, with tech stocks continuing to lead the way; interrupted by sudden plunges when something like a bad inflation number pops up; only for the Fed to fall over itself to shout “nothing to see (or fear) here”.

That probably keeps working to keep the party going, until at some point it does not.

I do not see how we can avoid that inevitable day; I certainly can’t tell you when it will arrive.

Originally published as Terry McCrann: No end to Wall Street’s free money party