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Affluent Investor | April 28, 2017

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Fed Rigs Markets, Not the Flash Boys

Photo by Getty Images

Photo by Getty Images

There’s been a lot of attention paid to high frequency trading (HFT) as of late. The question has been raised as to whether or not HFT rigs markets. It is true that HFT adds nothing to GDP and is simply a legalized form of high-tech front running. However, the real problem with the stock market — and the economy — as a whole isn’t the fact that HFT skims pennies off transactions from institutional traders; but rather that the Fed has rigged interest rates and asset prices to the extent that investors can no longer distinguish reality from fiction.

It is well known that the Fed has already purchased trillions of dollars’ worth of MBS and Treasuries since the start of the Great Recession. It is also no secret that the Fed Funds Rate has been pegged at zero percent since the end of 2008. Yet, somehow, this is not considered rigging the market. Nor do these conditions elicit the proper scrutiny of most investors, but instead, are nearly universally embraced as the perfunctory and necessary undertakings by a prudent central bank.

Market participants are ignoring the fact that the cost of money and the supply of credit and savings — the most important signals in an economy — should be set by the free market and not manipulated by the Fed.  But investors are now taking their ignorance a step further. Since investors refuse to acknowledge the central bank’s unprecedented influence in monetary affairs, it then follows that they have also deluded themselves into believing the Fed has not been the primary driver behind stock market gains.

Wall Street is fond of claiming that earnings growth has been relatively healthy throughout this “recovery” from the Great Recession and that earnings are the “mother’s milk of stocks.” Earnings growth comes from consumer spending because consumption drives the U.S. economy. In fact, seventy percent of U.S. GDP is derived from consumption. Therefore, it is logical to conclude that this was the reason behind our government and central bank’s efforts to boost consumption following the credit crisis.

Forty nine percent of Americans receive transfer payments and yet only 47% of U.S. citizens pay Federal income taxes. The Fed has monetized $3.5 trillion worth of government obligations since 2008. It did this in order to allow the Federal government to run trillion dollar deficits for years on end without debt service payments spiraling out of control.

It is abundantly clear that the Fed rigged lower debt service costs for both consumers and the government in order to artificially boost consumption. In addition, keeping interest rates at record low levels directly re-inflated bond, real estate and equity market bubbles. This further boosted money supply growth and fueled greater consumption.

Since real wages have been falling, our government has sought to boost consumer spending by propping up asset prices and lowering interest expenses, rather than seeking a viable market-based economy.

Therefore, it is completely silly to believe our stock market is not rigged. It is. But much more so by the government than it is by the “Flash Boys”. The markets, and the economy as a whole, are rigged in favor of the wealthy and those involved with financial services, but against the middle class and those that embrace free markets.

To believe otherwise is to claim that interest rate levels have no relationship to debt levels, money supply growth, asset prices, equity market values, or economic activity. Only a fool would then maintain that the Fed has not rigged markets. And it has done so for the direct purpose of artificially boosting consumption, which has led to an increase in GDP and earnings growth. This has in turn created a synergistic effect and spurred stock prices to an even more unsustainable level following the initial boost received from the Federal Reserve.

Once the Fed stops buying banks’ assets (the very essence of QE) these institutions will have no need to replace them. Therefore, the money supply will shrink as asset prices tumble. It is then logical to conclude that the end of the Fed’s manipulation of interest rates and money supply will lead to a collapse of this phony consumption-driven economy, as it also takes the stock market along for the ride down.

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

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  • Michael , in fact it is all a consortium of the unholy alliance triaf? The Fed, the wall street elites and the 9 largest banks. You are correct i It is not at all new and goes directly back to 2008.That is when the smart guys worked pout this cushy agreement that is not spoken of outside of closed doors. And that is when GS and others became banks all of a sudden for good reason(because they could). These criminals just make it up as they go along and all is simply a giant illusion and control mechanism! But in truth it has always been this way to some degree? But no question the Obama admin has put it all on steroids.
    But like all illusions , it is starting to crumble as more and more people finally see it is all lies , subterfuge and distortions to keep their ship afloat so they can keep raping the system ? That would be you and me !
    So what happens now that Russia, China, Iran,Brazil, India and others are leaving the USD/petro dollar? So the only question now is how long can they keep the illusions alive?

  • OnTheRightInTampa

    Nicely written, but as they say, “There is nothing new under the Sun”. The only thing ‘us commoners’ can do is hope to win enough side-market bets to make some money – yes, it can be done. The REAL money people dance on tons of gold – most of us shuffle around in pennies. It’s simply the GOLDEN RULE – and goes back to Biblical times and the MONEY CHANGERS…

  • reggiec

    When adjusted for inflation, the stock market averages have only increased slightly in value. since 1915. Since 1915 the dollar has been inflated 2,286.8 %. What would have cost $20 in 1915 would now cost $467.
    It is not how many dollars you have that determines wealth, it is what those dollars will buy.
    To really determine what something should cost we have to look at how much energy was used to produce something during all inputs in the production of any product or service.
    Money is only a measure of the energy used.
    The cost of energy depends on its availability and a formula that cannot be ignored.
    EROEI= Energy Returned Over Energy Invested. If it takes 100 units of some kind of energy to produce 100 of the same units of energy you have not made any gain.

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