David Einhorn explains the Fed’s obsession with US stocks

In these crazy times it is important to get grounded in a simple analysis of what exactly is driving the markets. This drives home the point the the Fed is/was driving the market higher and the second inflation becomes a problem, US equities have a problem. PCE/CPI may not be at 2-2.5% but they will get there soon and then what is the arrow in the quiver of the elite? With interest rates already at .25% and mortgage back securities being gobbled up by the Fed there is not much left to stimulate save the purchase of car loans and perhaps student loans. War I would say lies quietly in Syria, but that is just me. And now Einhorn’s expert analysis:

The great David Einhorn sums up the market in a concise three minutes time. For anybody that doubts the name of this website (MilwaukeeStory), in this case finally it is relevant as Einhorn grew up just miles from me in Milwaukee.

Highlights:

“I think the government is much more involved in the markets, I think the government interferes much more in the markets and is much more concerned with than I would have anticipated, I think there is less ‘free market’ in the market and much more centralized control.”

“One of the things I’ve notices through the crisis…is that it sometimes feels that the Federal Reserve is more concerned about which way the next 50 points in the S&P go than your average hedge fund manager, and I would not have expected that before the crisis…”

“I want to talk about when I figured out that the Fed was principally concerned with the stock market (Charlie Rose: Right) On the Martin Luther King holiday in 2008 which no one will remember but the markets in the US were closed and the markets in Europe were open and over that holiday weekend on Monday the European markets feel an enormous percentage and the US futures market was indicating that the market would be down a lot and it looked like there must be some huge problem going on in the world. The Federal Reserve then called an emergency meeting and they lowered the interest rates by 75 basis points before the market opened on Tuesday morning. So the US market never even opened at the lower level because they saw the support.”

“So the question is is what was going on that caused a need to provide this help to the system?”

“It later emerged that the Fed really did not know what the problem was.”

“They simply saw that the markets were down a lot. And then in a week it came out that there had been a rouge trader at a large French bank that had taken on some enormous position, and the French bank when they discovered this decided that they weren’t gonna unwind this in some orderly fashion but instead they were going to dump a huge amount of equities to unwind this fella’s positions on a Monday of a US holiday weekend, which had a disproportionate effect.”

And the humdinger:

“It seemed to me if the Federal Reserve was willing to cut interest rates by 75 basis points because some French bank was unwinding a proprietary position when nobody else was around, I knew that that was really where their primary focus was. And as I have watched things since then, nothing has taken me off of that belief.”

Filed Under: Economics

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  1. tsicby says:

    Wow. Just wow.

  2. Josh says:

    Definitely still relevant but from 2010.

    http://www.charlierose.com/guest/view/7025

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