Archive for the ‘Supply of Money & Common Stock Prices’ Category

Feldstein called it: Stocks are headed for a fall …

February 9, 2018

“The Fed’s easy monetary policy has led to overvalued equities”
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A couple of weeks ago, we posted Feldstein: Stocks are headed for a fall …

Now that the stock market has “corrected” by over 10%, it feels like time for a flashback.

Feldman called it … and, decades ago, I had researched (and confirmed) the basis of his forecast.

So, did Iact of Feldstein’s prognostication?

Of course not …

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Let’s start by taking a stroll down memory lane ….

Over 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

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The article summarized an econometric study (think: big, hairy financial model) that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

That is, when the Fed adds liquidity into the market (think: “quantitative easing”), much of money flows into the stock market – rocket-boosting stock prices.

And the opposite is true. When the Fed tightens, stock prices fall back into earth orbit.

OK, fast forward to today.

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Feldstein: Stocks are headed for a fall …

January 18, 2018

“The Fed’s easy monetary policy has led to overvalued equities”

==========

Let’s start by taking a stroll down memory lane ….

Over 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

clip_image001

The article summarized an econometric study (think: big, hairy financial model) that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

That is, when the Fed adds liquidity into the market (think: “quantitative easing”), much of money flows into the stock market – rocket-boosting stock prices.

And the opposite is true. When the Fed tightens, stock prices fall back into earth orbit.

OK, fast forward to today.

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Maybe, the Fed’s 1/4% rate increase is just a shiny object …

January 4, 2016

In a prior post, we opined that the Fed’s 1/4% rate increase shouldn’t have a material effect on business investment or consumer mortgage rates.

For details, see Fed Watch: Is 1/4 of 1 percent a big number or a little number ?

But it will have a BIG impact on the cost to service the U.S. Debt … which is now over $18 trillion.

A basic math principle:  A little number times a very big number results in another very big number.

In this specific case,  $18 trillion times .25% equals $45 billion.

 

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That said, I don’t think that the Fed discount rate is the right number to watch … especially if you’re a stock market watcher.

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Why did the stock market get over valued?

August 28, 2015

This was a week that market analysts retroactively tag “a long anticipated correction”.

Yeah, right.  That’s what you guys have been saying.

DJIA 08-24-15 5 years
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This week’s market dynamics beg a bigger question:

Why, given a sluggish economy and DC disarray, did the stock market keep marching forward to record highs … that met their come-uppance this week?

Easy.

Let’s start by taking a stroll down memory lane ….

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Bernie Sanders missed a big opportunity on Monday …

August 26, 2015

Yesterday, we posted about high frequency traders crowing about their high profits from Monday’s unprecedented stock market volatility.

Arguably, their methodology — hinging on fast data and low transactions’ costs — fanned the volatility flames.

I was surprised that Bernie Sanders didn’t seize the moment to say “I told you so” … and to pitch his Financial Transactions Tax.

Given the stock market bounces this week, I though it would be timely to reprise a post from a couple of weeks ago which has heightened relevance and timeliness …

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Shocker: I agree with Bernie Sanders’ Financial Transactions Tax … err. make that “half-agree”

Dem-Socialist candidate Bernie Sanders doesn’t serve up much that I agree with … but, there is one reheated idea that I half-support.

Sanders proposes that financial transactions be taxed … roughly 1/2% for most trades … slightly lower for for some categories of investments … say, Municipal Bonds.

Sanders would use the new tax proceeds to fund public college for low-income students.

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Let’s dissect the proposal … then, for what it’s worth, I’ll tell you where I agree and where I disagree …

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High frequency traders crow: “Best day since the 2010 Flash Crash” … say what?

August 25, 2015

Yesterday was a historically spectacular day on Wall Street … DJIA down 1,000 on the open, rebound by about 750 points, back down by 750.

Unprecedented volatility.

DJIA 08-24-15

Geez, was the world’s economic structure changing that much hour-to-hour?

Was new economic  information flowing in at warp speed?

Nope.

Sure, there was a deepening understanding that the market is over-valued and that China’s economy is in trouble.

That explains a big correction, but what about the hour to hour volatility?

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Shocker: I agree with Bernie Sanders’ Financial Transactions Tax … err. make that “half-agree”

July 22, 2015

Dem-Socialist candidate Bernie Sanders doesn’t serve up much that I agree with … but, there is one reheated idea that I half-support.

Sanders proposes that financial transactions be taxed … roughly 1/2% for most trades … slightly lower for for some categories of investments … say, Municipal Bonds.

Sanders would use the new tax proceeds to fund public college for low-income students.

image

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Let’s dissect the proposal … then, for what it’s worth, I’ll tell you where I agree and where I disagree …

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Why does the stock market hit record highs despite a sluggish economy?

November 15, 2013

Yesterday, the stock market soared to a new high, again.

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Why, given a sluggish economy and DC disarray, is the stock market still moving higher??

Easy.

Let’s start by taking a stroll down memory lane ….

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Why did the stock market hit record highs despite a sluggish economy?

September 19, 2013

Yesterday, the stock market soared when Bernanke announced the continuation of the Fed’s Quantitative Easing program … that is, the Fed plans to continue pumping $85 billion dollars per month into the economy.

stocks surge on Fed action

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So, why did the market reach record highs?

Easy.

Let’s start by taking a stroll down memory lane ….

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$$$: Time to move to cash?

September 5, 2013

First, the disclaimers:

1) I don’t give investment advice.

2) I think Jim Cramer is a blowhard.

But …

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Last week, a friend of mine who seems to have a touch reading the market alerted me that he was moving strongly towards cash … away from stocks … and far away from bonds.

Hmmm.

Cramer must have been listening in.

Here are Cramer’s 7 reasons to move to cash …

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Why the Fed’s QE isn’t booming the economy …

July 24, 2013

Two related articles caught my eye …

First, the Washington Post editorialized that:

The only part of the Obama economy that has flourished  is Wall Street.

Only the trickle-down from the wealthy financial players, who have thrived off the conveyor belt of money as it travels from Washington to Wall Street, has had much of a positive effect on the economy as a whole.

Let’s break down the economic fundamentals.

First, a chart showing the “conveyor belt of money” …

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Note that the M1 money supply increased from about $1..4 trillion in 2009 to today’s $2.6 trillion.

Shouldn’t a cool $1.2 trillion more in supply of money get the economy cranking into overdrive?

Here’s the rest of the story …

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