Unchanged: QE and stock prices

Welcome back to Unhedged. The third day, and the bulls and the bears are already at war in my inbox. Thanks for the comment. Email me if you want to join the dispute: robert.armstrong@ft.com

QE and stock prices (one part)

Jeff Gundlach, a well-known manager, He said soon:

“We have a relationship between the Fed to grow its currency and the price of the S&P 500 which has been in operation for many years, since it began to decline, and it’s like a scientific rule. It’s like, if you take the S&P 500 capitalization, then you share it with the Fed paper. , it seems like a never-ending cycle. ”

Gundlach is smarter than I am. This is why I am rich and I am a journalist. And he is speaking figuratively here. But if anyone thinks, even figuratively, that the market adheres to the rules of complex science, we should hit the big doubt button right away.

Here is the S&P and Fed balance sheet chart, from Refinitiv:

The relationship is unstable, even since last year. The two lines move in one direction, but in different directions. The market rose sharply with the first major purchase, but has continued to grow rapidly, as well as Fed purchases have slowed. This is a clear statement, but someone has to make it, and today I am that person, obviously.

This is a long time to look at the relationship:

The two lines don’t even have a cross path! After the ’08 crisis, the Fed stepped on oil and the market continued to fall, for a while. And between ’17 and mid ’19, the Fed traded its position and the market soared, if not evenly.

At the same time, the relationship is simple and important, isn’t it? Well, the Fed chair says no. Here is Jay Powell at his last press conference, when asked if the stock market was on his radar:

“There is happiness in the marketplace, and I do not say that it is out of line with money. . . but it has a lot to do with vaccination and economic openness – that’s what has been driving the markets. ”

This is bullshit, in technical skills of “bullshit” by Harry Frankfurt. Sanama. The clear meaning of his words (“financial plans are not essential to the pursuit of chaos”) has nothing to do with him in any way. He establishes expectations for his actions. The message is: “Unemployment and inflation are just some of the things I think about; the market could be flooded with lush green fountains like Linda Blair inside Demon-possessor and I do nothing. “Everyone knows this is the message, and they are not allowed to say it in public, and that is fine.

But we know that Powell despises things. Here is John Hussman, the most famous bear, in FT featuring pithy is right The description of the QE-stock system applies:

“Purchasing goods from the central bank works by removing interest-bearing shares from their hands, and replacing them with zero-interest rates. . . aggravating the instability of financial managers who are entitled to, in addition, have zero-interest rates. The moment a person tries to put this money ‘in the stock market, it immediately comes out’ through the seller. ”

QE means there is more money around. In some cases, this makes people feel that they have more assets, compared to other things they may have, such as stocks. That is why they exchange money with stocks. But someone has a waste of money, and he sells it again, too. It’s a hot potato, but it’s money. Increased popularity of items other than money compels the price of other items.

This is a better description of the relationship between QE and stock prices than the average one that goes “pushing economic prices down, QE lowers lower prices on modern stock markets, and increases their value”. This explanation may be true, in a sense, but this kind of mathematical rhetoric promotes the idea that stock prices are determined in a large spreadsheet in the air, filled with inputs. It’s a physical jealousy again. Stock prices are not bound by material laws, but by the uncertainty of psychology.

More on this tomorrow, unless a major issue arises.

Good reading: Buffett and Wells

This is my friend Eric Platt story how Berkshire Hathaway has lost most of its Wells Fargo shares. The bank was previously a favorite of Buffett, prior to the 2016 fake news scandal by management in response. The Berkshire revelation came close to the Wall Street Journal he announced that some women are “pouring into banks as before” as a play on economic growth.

Wells Fargo is cheaper in price / pricing than Bank of America, a bank that Berkshire still has a ton of. It is in the middle of a logging program that should boost profits in a few years. At one point it removes the regulators behind it so that it can grow. It looks like Berkshire stock. Berkshire has a long history and makes decisions on all sorts of grounds that no longer affect the foundation. However, I wonder what is going on.