The Stock Market: Plenty Of Money Around

Sep. 11, 2022 10:43 AM ETSPY, IVV, VOO, VTI, DIA, IWM, QQQ9 Comments
John M. Mason profile picture
John M. Mason


  • Fed chair Jerome Powell and other Fed leaders have been talking up how serious they are to stick with their program to tighten money and to reduce inflation.
  • Stock prices first went down and, then stock prices rose. The Fed can't seem to keep the market volatility under control.
  • Sophisticated investors are still looking for "oversold" situations so as to make some money on the market swings.
  • The problem may be that there is just too much money floating around the financial system, money that the Fed has pumped into the economy over the past two years or so.
  • This may mean that the current Fed program is not sufficient and must be even more severe in order to reverse the inflationary situation it has created in the past.

American dollar currency symbol

Daniel Grizelj

Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, Lael Brainard, the Vice Chairman of the Board of Governors, and other officials of the Federal Reserve have given strong support this week to the Fed's efforts to tighten up the monetary ropes and bring inflation back down to around the Fed's target goal of 2.00 percent.

Stock prices rose this week.

Previous to this there had been three weeks of downward movement in stock prices as the Fed continued to follow its plan to bring consumer prices under control.

Investors don't seem to want to cooperate.

Stock prices dropped on Tuesday and Wednesday this month.

Stock prices rose on Thursday and Friday.

Why The Rise?

The strongest reason for the rise in prices on Thursday and Friday seems to be the one that Akane Otani and Joe Wallace presented in the Wall Street Journal.

Stocks began the week lower but then made up ground over the following days, with shares of banks, manufacturers, and consumer-discretionary companies helping lead the charge. Analysts said at least some of the recovery seemed to be fueled by investors looking for bargains after three consecutive weekly losses that had wiped out much of the market's summer rally.

Some indicators indicated that the market was "oversold."

There is a general feeling that an "earnings collapse" is not in the near future.

After this, there is lots and lots of uncertainty.

Volatility is high, very high.

Sophisticated investors see this as a chance to "play the market."

Look for bargains. Ride them for a while. Then sell.

What's Behind This?

The question is, what is behind this?

Is there something here we are missing?

Let me make a suggestion.

In other areas of finance, we have been talking about all the money that is available to the system.

We talk about how the Fed must go beyond what they are now trying to do and accept the fact that since the beginning of 2020, the Federal Reserve has pumped $4.5 trillion into the financial system of the economy through the purchase of securities.

The current plans are, hopefully, to remove up to $2.5 trillion of these funds.

That means, the Fed will leave roughly $2.0 trillion in the financial system.

Any other time, we might say that $2.0 trillion is a "lot of money."

In fact, right now, I would say $2.0 trillion is a "lot of money."

So, the Fed put $4.5 trillion into the financial system since 2020 and is planning on taking out only $2.0 trillion of it.

This, it seems, is a lot of money to "leave around."

That is, whereas the Fed is looking to remove a lot of money from the economy by reducing the size of its securities portfolio, it is still leaving a lot of money around to chase prices, to play the markets.

We have been ignoring this fact all along.

The Fed puts $4.5 trillion into the financial system, but it only takes $2.5 trillion out. This means that there is still a lot of money around to produce rising prices, whether they are fuel prices, housing prices, stock prices, or whatever.

In other words, the Fed has created the inflationary situation.

The Fed did this for "a good reason." It worked during the spread of the Covid-19 pandemic to err on the side of monetary ease. It did not want to create a mistake by not putting enough cash into the economy.

But, now, on the other side of the "rescue", the Fed is not looking at the other side.

An added $2.0 trillion of money to the economy can still be very inflationary, not only for consumer prices but for stock prices and for the prices of other assets.

That is, sophisticated investors have a lot of money to operate with and a volatile stock market can be a perfect place to earn a lot of extra cash.

In other words, the Federal Reserve created the situation and now, facing a very inflationary environment, the Federal Reserve has a responsibility to fully reverse the distortions that it has created.

If this is the case, the Federal Reserve has a long way to go to help return the U.S. economy to a more normal environment.

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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