Heroin is a highly addictive drug. It is an opioid like morphine, codeine, and methadone. One of the reasons heroin is so addictive is that our brains have receptors for opiates that our body naturally produces—the endorphins produced during or after exercise for example.
When an addict starts using heroin daily, his brain stops producing natural opiates because it is getting all the opiates it needs and more from the heroin. If the heroin addict continues using for years and years, he slowly trains his own body to cease all natural dopamine production.
A dependency is created where the user needs the opiates from heroin just to feel normal.
Why am I telling you about heroin addiction? Recent price action in the financial markets reminds me of a highly destructive drug addiction. After years of propping up asset prices with multiple misguided money printing campaigns, the Fed is planning to kick the habit at the end of the month.
Financial markets have thrown a fit and the policymakers pushing the product are having second thoughts about quitting (witness James Bullard’s jawboning this week). We’ve only had a mini-correction of the bubble conditions the Fed helped facilitate and already investors and policymakers are begging for the money printing to continue. Years of quantitative easing has conditioned many to believe markets can’t function normally without stimulus.
The market might not be able to function at today’s bubble valuations without the continuous drip of Fed liquidity, but that’s no reason to keep up the habit. Would you tell a heroin addict to keep using because he functions better when he’s high? Of course not, because you understand that long-term drug use destroys the mind and body.
Jeremy Jones, CFA
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