By Gregory Mannarino TradersChoice.net
Before we begin, let’s define what a “Fed Put” is…
A Fed Put is defined as a mechanism by which the Fed, by keeping bond yields/rates artificially suppressed, drives cash into risk assets/stocks. This “Fed Put,” was previously known as the Greenspan Put.
Alan Greenspan, the then Fed. Chairman, repeatedly lowered rates and implemented easy money policies to prop up the stock market during his tenure,1987-2006.
(A new Fed. Put situation is about to begin).
In large part, the mania behind the “Dot-Com” bubble/crash was hyper-inflated via the Greenspan Put. It was also his tightening of monetary policy in the Spring of 2000, which allowed the bubble to burst.
Following the stock market crash/financial meltdown of 2008, the Fed. Again, brought back the Greenspan Put, which has now become known simply as the Fed. Put.
Without exception, every single time that the Fed. Has implemented a “Put” to prop up stocks, it ends in disaster.
Why is that one might ask?
The answer is simple.
Call it what you want, a Greenspan Put, or a Fed. Put, artificially suppressed rates/easy money policy drives cash into the stock market therefore inflating a bubble… but it gets worse.
Cash moves through the markets in predictable patterns. Artificially suppressed rates open a doorway for cash to make its way into risk assets/stocks. Think of it like this. If a “Fed Put” is causing cash to make its way into the stock market, then it must mean that cash is coming from other places. Makes sense?
A Fed. Put causes cash mainly to be pulled from “risk off” assets, such as commodities. So, the set up here is simple. A Fed Put, BY DESIGN, causes MASSIVE distortions in the price action of assets… it also creates opportunities.
Investors understanding how a Fed. Put works, will overexpose themselves to risk assets/stocks, further exacerbating and therefore fueling a stock market bubble/hyper-bubble.
Investors who are aware that during a Fed. Put situation cash will make its way into stocks, also understand that assets like commodities will become massively undervalued.
Therefore, the Fed. Put gives investors an opportunity to acquire commodities extremely cheaply.
A Greenspan Put/Fed. Put causes massive price action distortions across the entire spectrum of asset classes, that THAT presents opportunity to make the system work FOR you, and not against you.
Central banks are now setting the stage for a NEW “Put” under the market. And this includes a series of rate cuts and more easy money policies. What will come along with this is more, and MUCH GREATER price action distortions-and therefore OPPORTUNITY.
Ultimately, this “Put” situation will eventually end just like every single one before it has-VERY BADLY for the stock market. The distortions which are created via the “Fed. Put” situation eventually balance out, and in the end result in a Merry-Go-Round stock market crash situation.
