Can Capital Expansion and Fed Action Co-exist?

There is nothing more comforting to the existence of capital (liquidity) than a good jolt of market-cap (appreciation). A healthy dose of equity rejuvenated. A Contra (counter) move such as the one today serves a good reminder to the kind of world we live in. With all the negativity and immense erosion of capital (occurring), we are yet reminded that it is not very wise to think of a world in the absence of capital markets. After all, did the evolution of civilization (or call it what you like) not go hand in hand with capital expansion in past (many) decades?

Well, there was technology for a while. And wow. What an immense impact did that create on the average person’s lifestyle. Communication, the digital world, all these elements transformed our civilization. No doubt that a lot of faith (and “appreciation”) was injected into the (many) components of our capital system. And price appreciation was not just factored in for components that were directly embedded in the fabrics of such amazing progress.

If anything could have been learned from the tech crash of 2001, it is that the reality of what (really) drives stock prices higher will often elude its many players. So how does this elusive concept tie into today’s market action?

Well, for once, I think that market players know (very well by now) what really drives equities higher. And, with that, they might understand, that progress (made in fixing our capital system) does not translate itself into brighter prospects to the capital system. Will markets really care, if indeed, a turn was just around the corner (and therefore drive stock prices higher)? And further, how would the markets really react (or function) once the Feds reestablish the status quo?

This Fed manufactured/orchestrated recovery has been a very long and bumpy ride. The many financials (such as Goldman Sachs (GS), or Citibank (C), for example) are testimony to that kind of action. That is not a surprise considering that there used to be days when (only) great economic news drove stock prices higher. Most elements within the capital system (as anemic as they might appear) are yet still (very well) intact. Good. But, it is too early to confirm that capital expansion, and Fed action, can indeed co-exist.

Disclosure: Author holds a short position in Financials