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QE and stock prices (part one)
Jeff Gundlach, a very famous bond manager, SAYS recently:
“We have a relationship between the Fed growing its balance sheet and the value of the S&P 500 that has been around for years now, ever since they started a lot of easing, and it’s almost like a law of physics. “It’s like, if you take the capital for the S&P 500, and you divide it by the Fed’s balance sheet, it seems like it’s always there.”
Gundlach is smarter than me. That’s why he’s rich and I’m a journalist. And he speaks here figuratively here. But if someone suggests, even figuratively, that the market follows laws like hard sciences, we should immediately hit the big red doubt button.
Here is an S&P chart and the Fed balance sheet, from Refinitiv:
That relationship isn’t always, even since last year. The two lines will move in the same direction, but at different rates. The market rose very quickly in the first large round of asset buying, but it continued to rise at the fastest pace, even as Fed buying slowed. It’s an obvious point, but someone has to be able to do it, and now I’m the person to be.
Here’s a slightly longer look at the relationship:
Both lines don’t even have the habit of continuing to move in the same direction! After the ’08 crisis, the Fed squeezed its foot in gas and the market continued to fall, only briefly. And between the mid -’17 and mid ’19, the Fed strained its hips and the market continued to be higher, if not evenly.
At the same time, the relationship is clearly strong and important, isn’t it? Similarly, the head of The Fed says no. Here is Jay Powell at his last press conference, when asked if market froth was on his radar:
“There’s a market buzz, and I wouldn’t say it has nothing to do with monetary policy… But it has a lot of value to do with vaccinating and opening up the economy – that’s a shifting market.”
This is nonsense, of technical definition of the “bullshit” suggested by Harry Frankfurt. He did not lie. The clear real meaning of his statement (“Monetary policy is not a major contributor to much of the market”) is not important to him in any way. He sets expectations about his own actions. The implied message was: “Unemployment and price hikes are all I can think of; the market can dig up green slime springs like Linda Blair. The Exorcist and I did nothing. ”Everyone knows that’s the message, and that he’s not allowed to make it clear, and that’s good.
But we know Powell is downplaying things. Here is John Hussman, a very famous bear, in FT with a pithy and accurate describe how the pricing mechanism of QE-stock prices:
The central bank’s buyout operates by removing interest-bearing securities from private hands, and replacing them with zero-interest base money. . . increases the inconvenience of investors having to, in combination, hold on to this zero-interest base money. Once an attempt is made to put this ‘liquidity’ in the ‘stock market, it immediately comes out’ through the hands of a trader. ”
QE means there is a lot of monetary restriction around. Sometimes, it makes people feel like they have a lot of things, which has to do with other things they can get, like stocks. So they sold some money for stocks. But there are others who have sworn money, and they also sell it. It’s hot potatoes, but there’s money. The increasing preference for items other than cash forces the price of other items to rise.
This is a much better explanation of the relationship between QE and stock prices than it usually goes “by pushing up Treasury prices, QE lowers discount rates on future cash flows in stocks, increased their price ”. That explanation may be true, in a way, but this mathy talk doesn’t encourage the idea that stock prices are determined by a huge spreadsheet in the sky, full of purposeful inputs. Jealous of physics again. Stock prices are not bound by the laws of matter, but by psychological uncertainty.
More on this tomorrow, unless some important news happens.
A good read: Buffett and Wells
This is my partner Eric Platt’s news story how Berkshire Hathaway dumped most of the rest of Wells Fargo. The bank was once a Buffett favorite, prior to the 2016 fake account scandal and the management’s preliminary response to it. The Berkshire revelation landed before the Wall Street Journal gideklara that some investors are “pouring into bank stocks like never before” as a game of recovery and raising inflation.
Wells Fargo is cheaper on a price / touch basis on the book than Bank of America, the bank that still owns Berkshire. It is in the middle of a cost -cutting program that should increase revenue in a few years. At some point it will get the regulators behind so it can improve again. It will look like a classic Berkshire stock. Berkshire has an extensive portfolio and makes these choices for all different reasons that do not include standards. However, I wondered what had happened.