Yep. QE is propping up the stock market

In by Poor RichardLeave a Comment


Ever wonder why the stock market is setting record highs while the economy remains in the doldrums? The answer is simple: Quantitative Easing (or as normal people call it, printing money).

From The Star Phoenix:

Many pundits seem keen on being the first to call the top as the U.S. stock market continues to set new highs.

no doubt the run has been rather impressive, but there are more important questions investors should be asking, such as: Why has the U.S. market done so well in the first place and why haven’t most other countries participated in the same manner?

The S&P 500 has rallied more than 20% in the past two years while the MSCI EAfE Index has been flat, the S&P/TSX has dropped over 8% and the Shanghai Index has declined roughly 20%.

The gap between the U.S. and other markets is also reflected in their respective valuations. The S&P 500’s cyclically adjusted P/E ratio (CAPE), which is a modification of the P/E ratio to account for the effect economic cycles have on profit, is 23.6, according to Goldman Sachs, or 26% above its long-term historical average of 18.7. The Canadian market is at 16.6, which is 14% below its long-term average of 19.2.

We believe the U.S. market has rallied because the U.S. is leading the recovery in the developed world, but even more so because of the actions of the U.S. federal Reserve.

Aggressive policies such as quantitative easing have had a powerful impact on inflating assets such as the U.S. stock market. While the fed will state this is a secondary benefit, there is no doubt of the tremendous wealth effect gained by propping up equity markets.

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It’s no surprise that QE isn’t exactly at the forefront of the minds of the average person who has a life to live. After all, monetary policy is confusing by design. If people truly understood what the federal government was doing and how it affected them, they would revolt (peacefully, of course). Regardless, we really should pay attention to it.

Printing money is theft, plain and simple. Even if you have paid your taxes, paid your bills, given to charity, obeyed the law and saved for a rainy day, the Federal Reserve can still steal from you by printing money. This, by definition, decreases the value of every dollar you have through inflation. Sure, you’ll hear politicians say that this isn’t true, that inflation hasn’t increased, etc. But regardless, common sense and basic arithmetic dictates that it is true. It has to be. All things being equal, if there are more dollar bills in circulation today than there was yesterday, then dollar bills, by necessity, must be worth less today than they were yesterday. It’s axiomatic.

To make matters worse, the latest iteration of Quantitative Easing is “open ended” which means that we’ll be printing $85 billion per month until one unelected man says it’s enough. And they want you to believe that they aren’t decreasing the value of the dollar? Mmmkay.

If you don’t have the money to buy something, you do without. If the federal government doesn’t have the money to buy something, they print money.

The point? Don’t believe the stock market. It’s lying to you.