Investors are counting on the so-called Powell Put to boost the stock market, while other highly connected people depend on other kinds of special favors. Not satisfied with average annual gains of 18% over the past nine years, investors in the stock market have been throwing a bit of a tantrum, demanding that the Federal Reserve put an end to the interest-rate increases that could threaten to end this once-in-a-generation bull market. In other words, investors are demanding that the Fed stop pretending that its primary duty is to achieve stable prices and maximum employment, and instead recognize that its real job is to do whatever is good for the market and the wealthy 5% of Americans who own it. In the financial press, this is known as the Powell Put. (A put is an option that gives an investor the right to sell a security at a pre-determined price as a way of limiting the damage during a market decline. By analogy, a cut in interest rates by Fed Chairman Jerome Powell and the rest of the Federal Open Market Committee — or at least restraint from further rate increases — would protect all investors, just as if they’d all bought a put option.) Alan Greenspan invoked the Greenspan Put several times in the 1990s, particularly after the Asian financial crisis threatened the “oasis of prosperity” of the dot-com bubble. After an emergency rate cut in September 1998, the Nasdaq COMP, +0.74% nearly quadrupled in the next 18 months. Investors were ecstatic. Time magazine declared that Greenspan, Treasury Secretary Robert Rubin and Treasury Deputy Secretary Larry Summers were the “Committee to Save the World.” Then, as now, lower rates weren’t needed to help the real economy, but to reassure skittish investors. It had become the accepted wisdom that markets had become so vital that everything — the whole world — depended upon them. Forget the hum-drum workings of the Main Street economy; it was Wall Street that mattered. And then the stock market collapsed, erasing trillions in wealth. It was a shallow recession, as they go, but it took nearly five years for employment to recover and 16 years for real median household incomes to bounce back. Then, as now, the real economy was doing fine while the financial markets became unglued. The quarter that Greenspan cut rates, the economy grew at an impressive 5.1% annual rate and the following quarter was even better. Inflation was way below target and so was unemployment. But the financial markets were in distress, with the yield curve having inverted and the Nasdaq flat for the year. It’s all so familiar to us. The expectation for a put from the Fed has only gotten more obvious over the past 20 years. Low interest rates for extended periods, quantitative easing and the quick about-face during the taper tantrum of 2013 fueled the perception that the Fed is highly attuned to what the market wants, even if it’s not what the economy needs. ‘Puts’ throughout the world It's not just the Fed. Investors, the wealthy and anyone with some connections (what Arabs call “wasta”) know they have a put coming to them whenever they get into trouble. We typically don’t call these favors or privileges “puts,” but that is effectively what they are: insurance against downside risks. And we usually don’t give these puts a second thought. It’s just part of the way the world works. What other kinds of puts do people think they are entitled to? • The Tariff Put is triggered when the administration is forced to send out someone (often Larry Kudlow) to reassure markets that Trump’s rhetoric on tariffs is just a negotiating tactic. In the end, we are assured, tariffs will be lower across the board and there will be more trade than ever! • The Tax Cut Put boosted profits of multinational corporations when they seemed to be softening. It was supposed to give the bull market another year of life, but the real point was to channel as much money as possible to the people who already have lots. • The TARP Putbailed out U.S. and foreign banks during the financial crisis of 2008. Many of these large banks would have failed without the Fed’s and the Treasury’s help, which would have meant reorganizing under new management. Instead, the same gang is still running the world’s financial system, and they haven’t learned a thing from their narrow escape. • If you are a U.S. company with overseas operations in the Caribbean or Latin America, you can rely on the U.S. Marines Put(sometimes outsourced to the CIA or to local thugs). • The Get-Out-of-Jail-Free Put protects white-collar criminals, fraudsters and tax cheats from any consequences of their criminal behavior. The Justice Department, Securities and Exchange Commission, the Internal Revenue Service and other regulators are eager to make a deal that won’t require you to admit any guilt or change any behavior. The fine is just the cost of doing business. • If you really have “wasta,” like Mohammed bin Salman, you can get away with murder andget a high-five from the capo di tutti capi, Vladimir Putin. • Even regular (non-millionaire) white folk have a certain amount of Get-Out-of-Jail-Free protection as part of their white privilege. You can probably get away with carrying a gun or using drugs or driving around with a broken tail light. Most likely, you won’t have to constantly show your ID unless you have an accent or pray to an alternative god with a tint. • Until recently, men with wasta could be 100% confident of the Put-Your-Hands-on-Her-Whenever-You-Want Put to protect them from any misunderstandings caused by treating women as their private property. • On the other hand, I know a young woman who takes advantage of what she calls The Pretty Girl Discount with anyone who will give her a break in exchange for a smile. • Celebrities get the VIP treatment wherever they go. First-class passengers got the Lifeboat Put when the Titanic went down with all the folks in steerage. These perks are a big reason people bite, scratch and claw for wealth, fame and power. Should the Fed ease up on the brakes? Yes, I think so, but not because some rich people are feeling the pinch. If the Fed does pause in its rate hikes, it should do it because the economy needs it, or because low unemployment isn’t stoking inflation. https://www.marketwatch.com/story/w...-most-entitled-people-in-the-world-2018-12-10
This has the way it's been for years. Market participants are always led to believe the market will always go up (just like home prices before 2007). Every financial planner in the world thrives on this concept.
Hello, Because for years the stock market has always going up over time. I love buying the SP500 index each time I get paid. Simple and easy and rewarding.
I thought ordinary people's pension funds own almost the entire stock market. In which case how do the wealthiest 5% of Americans own it?
Maybe talking about fat cats who own large pensions. I just chuck this stuff out to get a bite. A bit like me playing with some guys on the ES Journal atm.