Blame the Fed for the Disconnect in Markets
The central bank has fostered an unprecedented amount of risk-taking at the expense of the long-term health of the economy.
The Federal Reserve has removed much of the risk from financial markets.
Photographer: Chip Somodevilla/Getty Images
British economist Charles Goodhart observed in the mid-1970s that “when a measure becomes a target, it ceases to be a good measure.” Some 45 years later, Goodhart’s Law is at the center of a fierce debate in financial markets over whether governments and central banks turned riskier assets such as equities into targets. And if so, are markets no longer measures of the economy?
Small investors seem to have figured out that the Federal Reserve has, indeed, targeted markets through its unprecedented stimulus programs. They know that markets are now designed for investors to win, as evidenced by the S&P 500 Index’s about 43% gain since late March despite the worst economic recession since the Great Depression. Dave Portnoy, the founder of the website Barstool Sports who recently took up day trading, recently explained it best: