Anyone who believes a central bank can support asset prices faces a paradox. While the Federal Reserve is given much credit for indirectly supporting equity and other asset prices, the price of an asset class it is directly buying and explicitly supporting has gone down, not up. Since its latest round of quantitative easing commenced, treasury bond and note prices have dropped and interest rates have risen. Debt markets are recognizing the implications of interest rate suppression and government debt on future growth, and the ability to make interest and principal payments on that debt. Prices of riskier municipal debt have dropped even more. Risk premiums are increasing. If debt markets are getting nervous, equity owners, last in the distributional line, should be terrified.

If what emerges from the regulatory interpretations of the “Volker Rule,” which seeks to halt banks’ proprietary trading, actually does reduce such trading, shadow banking speculation will diminish. Equity markets will lose an important Federal Reserve erected prop. That may kick off the stock market’s downfall, or more likely, it will collapse of its own weight when rampant optimism in central bank policies can no longer avoid confronting those policies’ deleterious results. However it ends, it will end badly, probably in a crash, as everyone realizes at the same time that the Fed did not really have their backs. The future cannot support creditors’ claims on it, otherwise their would be no wealth tax trial balloons wafting through the air. If there is not enough for creditors, there will be nothing at all to satisfy the unrealistic, central bank-stoked expectations of equity owners.

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