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Welcome back to Unhedged. On the third day, the bulls and bears were already at war in my inbox. Thanks for your feedback. If you want to join the battle, please email me: robert.armstrong@ft.com
Quantitative Easing Policy and Stock Prices (Part One)
Very famous bond manager Jeff Gundlach (Jeff Gundlach) Say recent:
“Since the Fed began quantitative easing, there has been a certain connection between the Fed’s expanding balance sheet and the value of the S&P 500 Index. It’s almost like the laws of physics. It’s like, if the S&P 500 is capitalized. , And then divide it by the Fed’s balance sheet, and it looks a lot like a constant.”
Gundlach is smarter than me. This is why he is rich and I am a reporter. He said metaphorically here. However, when someone even implicitly suggests that the market follows laws like hard science, we need to press the big red doubt button immediately.
This is a chart of Refinitiv’s S&P and Fed balance sheets:
Even since last year, this relationship has been unstable. The two lines move in the same direction, but at different speeds. In the first round of large-scale asset purchases, the market rose rapidly. However, although the Fed’s purchase rate has slowed down, its growth rate has remained at a similar rate. This is a very obvious point, but it must be done, and today I am obviously that person.
This is a longer-term observation of the relationship:
The two lines do not even maintain the same demeanor in the same direction! After the ’08 crisis, the Fed stepped on the accelerator, and the market continued to fall for a period of time. Between the mid-17s and the mid-19ths, the Fed reduced its holdings and the market moved higher, even if the situation was not balanced.
At the same time, this relationship is obviously strong and important, right? Well, the Fed chairman said no. When asked if the market bubble is on his radar, this is Jay Powell at the last press conference:
“There is a bubble in the market. I will not say that it has nothing to do with monetary policy… but it has a lot to do with vaccination and economic opening-this is what drives the market.”
This is nonsense, in Technical significance “Nonsense” put forward by Harry Frankfurt. He did not lie. The clear factual content of his statement (“Fiscal policy is not an important factor in causing market bubbles”) does not matter to him either way. He is setting expectations for his behavior.The implicit message is: “I only care about unemployment and inflation; the market can spit out a green slime fountain like Linda Blair Exorcist And I will not do anything. “Everyone knows this is news, and he is not allowed to expose it, which is good.
But we know that Powell made an understatement. This is a very famous bear from the Financial Times, John Hussman (John Hussman), Exquisite and accurate Explanation of the operation mode of the quantitative easing price mechanism:
Central bank asset purchases work by removing interest-bearing securities from private hands and replacing them with zero-interest base currencies. . . In general, investors who must hold this zero-interest base currency will feel uncomfortable. Once people try to “invest” this liquidity into the stock market, it will immediately “flow out” through the hands of the seller. “
Quantitative easing means more funds will be lost. Sometimes this makes people feel that they have too many things, relative to other things they can own, such as stocks. So they exchange some money for stocks. But then someone else got the damn money, and they traded it out. This is a hot potato, but there is cash. People’s preference for commodities other than cash is increasing, forcing the prices of other commodities to rise.
This is a better explanation of the relationship between quantitative easing and stock prices, rather than the common saying that “by reducing the price of Treasury bills, quantitative easing prices reduce the discount rate of future cash flows of stocks, thereby increasing stock prices”. In a sense, this explanation may be correct, but this mathematical discussion encourages the idea that stock prices are determined by huge spreadsheets in the sky filled with objective input. This once again makes physics envy. Stock prices are not subject to the laws of matter, but subject to the uncertainty of psychology.
Unless there is a major news, there will be more discussions tomorrow.
A good book: Buffett and Wells
This is from my colleague Eric Platt News story How Berkshire Hathaway sold its remaining Wells Fargo stock. The bank used to be Buffett’s favorite, before its 2016 fraudulent account scandal and management’s initial response to it.Berkshire’s disclosures landed before the Wall Street Journal Declare Other investors “are pouring into bank stocks in unprecedented ways” as a means of economic recovery and increased inflation.
On a price/tangible book basis, Wells Fargo is cheaper than Berkshire, which still has a large number of U.S. banks. It is in the middle of a cost-cutting plan that will increase revenue in a few years. At some point, it will get the regulator out of trouble so it can grow again. It looks like a classic Berkshire stock. Berkshire has a huge investment portfolio and made these choices for a variety of reasons that do not involve fundamentals. However, I don’t know what is going on.
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