Fed Opacity is Suffocating the Markets

Market observers continue to give short shrift to the fact that the Federal Reserve is the perpetrator of the “Red Wedding” in the markets. The Federal Reserve doesn’t trust the markets. It thinks it knows better than the markets how to set the price of capital and create the conditions for economic growth.

Every once in a while, we get an errant number like the revised second quarter GDP number of +3.7% to tease us into thinking that they know what they are doing. But once we look below the headline number, we find the same weakness that has plagued the economy since the financial crisis. Years of ZIRP and QE have suffocated the economy in too much debt that will continue to smother growth for years to come.

The Fed continues to speak out of both sides of its mouth, when its best course of action would be to say nothing. On Wednesday, New York Fed President Bill Dudley sought to calm markets by saying that the case for a September rate increase was “less compelling.” On Friday, Fed Vice Chair Stanley Fischer said that a September hike was still a possibility.

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The Economic “Red Wedding” Begins

I love being right…Does that make me a bad person?

I have been warning for months that the market is overvalued, that the global economy is sick, and that stocks are headed for a fall. While CNBC and the rest of the clueless bulls break out the arm-bands, readers at Money Morning – who have been paying attention – should not have been surprised by what happened last week.

The collapse in commodity prices that began a year ago was a raging canary in the coal mine, screaming that something was wrong in the global economy. And that was the faltering of Chinese growth, which all along had been built on a fragile foundation of debt.

Just as I forecast two weeks ago, U.S. stocks saw their biggest weekly losses in four years. The Dow Jones Industrial Average plunged -5.8% or more than 1000 points to close at 16,459.75 and is now officially in correction territory, down more than 10% from its recent sugar high. The S&P 500 was not far behind, falling -5.77% to 1970.89. The S&P 500 is now down 4% on the year and has generated a negative return over the last 12 months. The high-flying Nasdaq Composite Index lost even more last week, collapsing by -6.78% to 4706.04. The small cap Russell 2000 fell -4.6% to 1156.79.
But these numbers don’t convey the hard, cold reality of the losses. Let’s put some meat on the bones. The U.S. stock market lost $1.4 trillion in value last week according to Wilshire Associates, with more than half the loss coming in Friday’s rout.

The world’s favorite company and investors’ favorite stock, Apple (Nasdaq: AAPL), has lost $72 billion in market cap from its recent high while Facebook, (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Google (Nasdaq: GOOG) lost a combined $100 billion.

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