Trump Says Fed ‘Has Gone Crazy’ Following Stock Market Selloff

Trump Says Fed ‘Has Gone Crazy’ Following Stock Market Selloff, by Justin Sink.

The broad U.S. stock market sell-off Wednesday took the S&P 500 to the lowest in three months, the Dow Jones Industrial Average plunged as much as 836 points and the Nasdaq 100 Index tumbled more than 4 percent for its worst day in seven years. …

President Donald Trump slammed the Federal Reserve as “crazy” for its interest-rate increases this year …

“The Fed is making a mistake,” he told reporters on Wednesday as he arrived in Pennsylvania for a campaign rally. “They’re so tight. I think the Fed has gone crazy.”

US Federal Reserve Building, back in 1937. This is the third central bank of the US (the other two died).

Trump’s latest attack on the U.S. central bank appeared to blame the Federal Reserve for a stock rout that market analysts mostly attributed to fresh concern about his trade war with China. Trump has been publicly criticizing the Fed since July for interest-rate increases and declared he was “not happy” in September when the central bank raised rates for the third time this year.

Trump, who has frequently invoked rising stock prices as an affirmation of his economic policies, downplayed the significance of the market drop even as he pointed the finger at the Fed.

“I think it’s good,” Trump said of the stock decline. “Actually, it’s a correction that we’ve been waiting for for a long time. But I really disagree with what the Fed is doing.” …

Trump’s public criticism of the Federal Reserve, whose chairman, Jerome Powell, Trump appointed, is a sharp departure from his recent predecessors. Presidents for more than two decades had avoided public comments on the Fed’s interest-rate policies as a way of demonstrating respect for the institution’s independence.

Unlike recent US presidents, Trump is a businessman and probably knows what he is talking about when it comes to interest rates and business. Or at least feels he knows, enough to give him confidence to speak out.

He’s right, this market is too high. By almost all historic metrics, the current US stock market is expensive to very expensive. However there are none of the usual signs that precede a crash. So presumably this sharp sell-off will just be part of a minor correction in the bigger scheme. Next year, however, is shaping up as the likely scene of a major crash.

Politically, the left and the media would like to blame a trade war for a crash. While the trade war might be a catalyst and is a current talking point d’jour, the reason for a crash is as always excess valuations compared to interest rates (bond prices). The recent move up in the US 10 year bond interest rate is the real trigger for the sell-off. For the last 35 years, and especially since the GFC, there has been too much newly created  money chasing assets, which have driven all markets to very expensive levels.

Btw, the tariffs so far between China and the US affect less than 1% of the value of good sold in the US or China. Compare that to the Depression era, when the figure was more like 60%. Recent tariffs are but a minor irritant.

Bear in mind that market and media commentary is always very friendly to the central banks. Central banks are powerful and provide the money, both to business and to economic consultants. They are virtually worshiped. Questioning the Soviet-style price-setting by bureaucrats that is the central banks main job is never done in polite company.

Could central bank policies be guilty for today’s overvaluations and sell-offs? Not bloody likely that you’ll hear about that in the media. But yes, they nearly always are. A decade ago Ben Bernanke, as head of the US central bank, finally got around to apologizing for the Great Depression, which he correctly blamed on two mistakes by the US Federal Reserve. Only took 70 years for that admission.

Today’s sell off was only 3.2%. The one in October 1987 was 24%, about 600 points when the Dow around 2,600. A fall of 24% today would be more like about 6,200 point, from today’s Dow of 25,000.

Btw, why is the US stock market ten times higher today than it was in 1987? Is it because there is ten times as much activity or profit, or living standards have gone up tenfold? Sadly not. It’s nearly all just due to money manufacture, not manufacture of more real goods and services. The long term historical rises in stock market indexes are mostly just due to inflation, which in turn is due to money manufacture. Did anyone give you any newly manufactured money, or did you have to earn yours from other people?