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October 9, 2013

Fed Board

Eleven years ago, Ben Bernanke said the following regarding the Financial System and the role of the Federal Reserve in it:

“I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers’ attitudes than to the economic fundamentals that by rights should determine the allocation of capital.” – Ben Bernanke, October 15, 2002

As readers know, I have been very critical of the post crisis QE management of all financial markets as they have stopped reflecting economic reality and have become tools for policy makers. If you think this statement is too harsh, look at the evidence in the chart below. Since 2009, the Fed’s balance sheet and the S&P500 stock index have had a 90% positive correlation. This is obviously statistically significant and points to the fact that capital markets have been centrally controlled since 2009. As for the direction of the (nominal) price of the stock market, just follow the Fed’s deeds…

S&P500FedBS

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