Today, CNBC featured on its program Rachel Fox – a 16-year old actress from Desperate Housewives who is also an active stock market investor (and a very successful one at that). Sarah outperformed an overwhelming majority of hedge funds in 2012, with performance figures greater than 30%. This is quite an impressive feat, especially considering the Dow was only up 5% in 2012.
Should anyone be surprised by this?
I argue no, there is nothing surprising about this feat – in a market with massive government inference.
Federal Reserve Chairman Ben Bernanke has made it a direct and explicit policy to artificially prop up the US stock market. It is his belief that rising asset prices are part of what mainstream economists call the “wealth effect.” The idea here is simply that pensioners, retirees, and any other market participant with investments in the stock market will look at their portfolios, see that they have gone up, and feel more confident to go out and spend. This spending is what Chairman Bernanke believes will revamp the economy and pull us out of the recession.
A 2012 exchange between Bernanke and Reuters’ Pedro da Costa highlights this point (Zerohedge):
QUESTION: My question is — I want to go back to the transmission mechanism, because speaking to people on the sidelines of the Jackson Hole conference, that seemed to be the concern about the remarks that you made, is that they could clearly see the effect on rates and they could see the effect on the stock market, but they couldn’t see how that had helped the economy.
So I think there’s a fear that over time this has been a policy that’s helping Wall Street, but not doing that much for Main Street. So could you describe in some detail, how does it really different — differ from trickle-down economics, where you just pump money into the banks and hope that they lend?
BERNANKE: Well, we are — this is a Main Street policy, because what we’re about here is trying to get jobs going. We’re trying to create more employment. We’re trying to meet our maximum employment mandate, so that’s the objective. Our tools involve — I mean, the tools we have involve affecting financial asset prices, and that’s — those are the tools of monetary policy.
There are a number of different channels — mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more — more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.
Stock prices – many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.
One of the main concerns that firms have is there’s not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason — their house is worth more — they’re more willing to go out and spend, and that’s going to provide the demand that firms need in order to be willing to hire and to invest.
So there you have it – it is official government policy. It is worth pointing out that the Federal Reserve, one must remember, has no money. It has no “reserves.” All market involvement it engages in, via purchases of government securities or otherwise, are done with digital entries that have no opposite reduction in any asset.
How does this relate back to Sarah Fox?
Simply put, with the government proverbial wind at your back, making money in stocks is easier than it otherwise would be had the government not been involved at all. Ms. Fox and her performance is eerily familiar to the 25-year-old condo flippers in the 2000’s, and the tech and dot-com “geniuses” in the late 90s. All of these strange abnormalities are the unseen effects of inflating bubble after bubble.
As we learn from the Austrians, all artificial booms must end in a bust.