Not Your Father's Stock Market Anymore ...

Over at the Los Angeles Times , Tom Petruno has written an article entitled, "Fed Powers the Stock Market Up." In it, he explains why the Federal Reserve is worried about US stock market averages. Here's part of what he writes:

Officially, the Federal Reserve isn't supposed to worry about keeping stock prices flying high. But when Fed Chairman Ben Bernanke was asked recently on Capitol Hill about the market's outlook, he sounded like a lot of bullish Wall Street investment strategists.

"I don't see much evidence of an equity bubble," he told the Senate Banking Committee in his semiannual testimony on Fed policy. Stocks "don't appear overvalued given earnings and interest rates."

More important for the markets, Bernanke pledged to continue the Fed's policy of pumping colossal sums into the financial system to support the economic recovery.

As stocks flirt with the record highs reached just before the global financial crash of 2008, memories of that catastrophe loom large. Many Americans have abandoned equities since the crash, terrified of living through another one.

Yet the Fed's efforts to keep the economy growing may not work unless the stock market keeps moving in one direction from here: higher.

What is Petruno's explanation for this statement? He claims, interestingly, that while certain banks have been described as too big to fail, that label might now be applied to the US stock market as well.

Mohamed El-Erian, who oversees $2 trillion as chief executive of money manager Pimco in Newport Beach is quoted as saying, "The Fed and the other central banks cannot afford to see a massive decline in equity prices."

And Steven Ricchiuto, chief economist at Mizuho Securities USA in New York, says that if the stock market were to fall drastically, "You would have every economist screaming 'Depression!'"

What are we to make of these statements? It used to be that people believed there was risk in the stock market – and there is. But we are being "educated" out of it.

In a chapter of my new book, Financial Freedom, entitled "The macro stock market illusion: Buy and hold blue chip equities for long-term success... stay away from risky investments," I explain that the current view regarding the stock market is less than 100 years old, less than 50, really.

It is only in the past few decades, with the advent of modern portfolio theory, that the investing public has been conditioned to believe that it is necessary to buy a broad portfolio of blue chip stocks – usually in various asset classes – and hold them, come hell or high water.

Whether it's the mainstream financial media or the one-on-one meetings with financial advisors armed to the teeth with Ibbotson Charts, the message is the same – buy and hold; only novice investors panic and sell during times of crisis.

Furthermore, the message is amplified with reams of financial data and statistics that create the illusion that investing is such an art form that it requires "financial wizards" to make "rational decisions."

Therefore, the best way to achieve prudent wealth management is to hire asset managers – experts – equipped to navigate the treacherous seas of financial information that can quickly capsize the portfolio of any "ill-equipped" person.

So today, no matter where in the Western world one travels, the theme is the same: Buy and hold blue chip equities but for heaven's sake, don't make the decisions yourself – hire the experts.

What contributes to this spiral of manipulation is the cooperation of central banks, especially the Federal Reserve. Ever since the 1987 stock market crash, a powerful agglomeration of individuals and groups sanctioned by the US government has worked together to prop up stock market prices.

This is done, in main, by keeping interest rates quite low and literally printing money to ensure that certain too-big-to-fail financial establishments remain liquid and invest in the stock market.

In fact, the powers that be even created a regulatory watchdog to assist the government in stepping in to "support" the stock market if it appears to be getting too "soft." The name of this group is the Working Group on Financial Markets , otherwise known as the Plunge Protection team.

Instituted by Executive Order 12361, The Group meets informally behind closed doors, convening at moments of potential financial crisis. It helps to make decisions concerning such things as the stimulus package and the governmental purchase of various businesses. Most of these types of moves are not necessarily "hidden" from the taxpaying public and that is really the scariest part of it all.

In truth, The Group appears to be mainly about maintaining faith in the illusion that the markets are strong by buying shares in the underlying companies that make up the major indices in the United States, and likely elsewhere around the world, as well.

Unfortunately, we live in a world where the majority of investors are granting far too much credit to the market data they are being fed. They are making decisions based on faulty premises. They often do not even understand the basics of monetary expansion and how that affects purchasing power.

The most important issue, however, is that the powerful artificial forces affecting stock markets cannot hold free-market adjustments at bay forever. That is why it is important to select stocks based not just on "mainstream" indicators of performance and industry leadership but also on the business cycle , apparent monetary stimulation and other outside forces that have been brought to bear on equities over the past decades.

It's not "your father's" stock market anymore. There are indeed tremendous profits to be made but one will have to adapt to modern realities to gain them.