The buyback bubble - how the Federal Reserve created the greatest stock market bubble ever

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The 2008 financial crisis ushered in the era of central bank intervention. What began as emergency measures, meant to rescue the economy after the bursting of the housing bubble, has turned into a permanent policy. The Federal reserve slashed its interest rate to zero, and kept it there for seven straight years. In addition, it had embarked on a series of bond purchasing programs, also known as quantitative easing. The assumption was that by suppressing long term interest rates, it could stimulate the economy and generate growth. But in hindsight, this is not what happened. In spite of these interventions, real GDP growth in the United States remained pretty weak.

The stock market, however, absolutely loved these interventions. Since the launch of quantitative easing, the S&P 500 index has risen by a whopping 600%. During this period the stock market has become completely detached from the real economy. Bad news for Main Street was considered good news for Wall Street, because it ensured that the flow of easy money would continue uninterrupted. FOMC meetings and subsequent press conferences became major market moving events, which the entire financial world would focus on. To this day, many economists deny the connection between QE and the rally in the stock market. But the correlation between the two is striking. Whenever the Federal Reserve printed dollars in order to purchase bonds, the S&P500 would rally, and whenever it stopped the printing, or god forbid tried to unwind its balance sheet, the index would enter a correction.

This video demonstrates the connection between the Federal Reserve's QE programs, and the rally in the stock market, through the mechanism of share buybacks. It also presents the case that the bubble has in fact already burst, and that we could be headed towards an epic collapse.

Music: Michael Kobrin - The Introvert

Disclaimer: I am not a licensed financial advisor. This article is intended for general informational purposes only, and should not be regarded as investment advice. Before taking any investment decision, please consult with a professional financial advisor, who may assess your personal investment objectives and needs.

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