Fed and TWTR Overvaluation, Evidence of Looming Market Crash: Stockman

[Revmitchell]

The Federal Reserve Wednesday reassured investors that it will hold interest rates near zero for a “considerable time” after it ends the bond-buying program known as quantitative easing in October. In response, the Dow Jones Industrial Average (^DJI) closed at a new record high.

Former Director of the Office of Management and Budget and author of the book, The Great Deformation, David Stockman, has significant concerns about that very policy.

“I’m worried… that we’ve got the greatest bubble created by a central bank in human history,” he told Yahoo Finance.

In a recent blog post, Stockman offered a handful of high-flying stocks as evidence of what he sees as “madness.”

“…Twitter, is all that is required to remind us that once

again markets are trading in the nosebleed section

of history, rivaling even the madness of March 2000.”



Behind the madness

In an interview with Yahoo Finance, Stockman blamed Fed policy for creating that madness.

“We have been shoving zero-cost money into the financial markets for 6-years running,” he said. “That’s the kerosene that drives speculative trading – the carry trades. That’s what the gamblers use to fund their position as they move from one momentum play and trade to another.”

And that, he says, is not sustainable.

http://finance.yahoo.com/news/twitter--overall-stock-market--massively-overvalued-211654515.html

 

[InTheLight]

Essentially Stockman is saying that the cheap money available right now is fueling lots of trading activity. And he is right. But the days of cheap money are numbered. If the Fed plays it correctly, the stock market correction shouldn't be devastating.

From the article:

As Yahoo Finance’s Lauren Lyster points out in the associated video, investors who heeded Stockman’s advice last year would have missed out on a 28% run-up in stocks. But Stockman remains steadfast in his belief that the current Fed policy and the resultant market behavior can not continue.

People need to trade the market given to them, not the market they think it should be.

That said, there will be a correction, probably when the Fed raises interest rates. This will be illogical since every half tuned-in investor knows the Fed will raise interest rates.