I was wrong earlier today.  I predicted an afternoon stock market rally, after the Fed released its policy announcement at 2:00 pm Eastern.  Instead, stocks and bonds dropped almost immediately after the announcement. 

The only substantive difference between what the Fed announced after its September meeting and today is as follows, courtesy of the Wall Street Journal’s Money Blog:

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

All it took was the deletion of the exception clause, the one which tempered the notion of diminished downside risks with the caveat that the tightening of financial conditions observed in recent months could…slow the pace of improvement..., to cause the markets to fall.

They fell because the Fed took something negative out of its assessment of current conditions, which the markets took as a hint that maybe, just maybe, things weren’t quite as bad as before. 

It would be hard to imagine evidence more clearly indicating the impossibility of the Fed ever withdrawing its stimulative measures.  If the Fed acknowledges even a hint of good news on the economic system it believes itself charged with managing, the financial markets consider it to be bad news for them, as it imperils the smack that’s keeping them high.  Economic performance and financial market performance have become negatively correlated, and all because of the Fed. 

For once, things really are different.  Never in the history of modern industrial economic systems have financial markets and economic performance become so unhinged.  Bad news for the economy has never been considered good news for the stock and bond markets, and vice versa.  But there it is. The stock and bond markets have come to reflect roughly the opposite of what the real economic system is doing, and the flip is all due to the Fed’s measures directed at saving (it claims) the economic system from some employment doldrums.

This time is different, indeed.  And when the scaffolding of lies the Fed’s monetary manipulations are built upon come crashing down, the resulting carnage in the real economy and in the financial markets will also be quite different from anything experienced before. 

But, count on a rally tomorrow.  And the next, and the next and the next.  So long as the bad news keeps pouring in, the markets will rally.  And every time there’s good economic news, the markets will crater, turning good news to bad.  Which then will compel more Fed stimulus.  And so the spiral into a black hole of meaningless financial markets grows ever tighter.

That’s the thing as it is.