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

Fed says: Stock market be damned.

December 20, 2018

… and, the market responds predictably.
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Yesterday, Fed Chairman Jerome Powell took a meat ax to the market.

As expected, the Fed inched interest rates up a notch — as planned, and as expected.

That’s OK … the economy need to be weaned off of near-zero interest rates.

But, despite indicators of an economic slowdown, Powell said there are still more interest rate boosts on the table for next year … count on ’em.

Pundits expected a more wiggle-roomed statement that the Fed would be watching what happens and be driven by the data.

Then, he deliver the coup de grace, saying “financial markets and the Fed’s balance sheet don’t matter.”

Au contraire, Mr. Powell.

The financial markets matter to folks holding financial assets … and the Fed’s balance sheet – a correlate to the supply of money in the economy – is a major determinant of financial markets’ strength.

Need proof?

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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 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”.

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.

(more…)

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.

(more…)

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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