Pethokoukis, Economics, U.S. Economy

The 2 charts that bust the myth of the Bernanke stock market bubble

Image Credit: Medill DC  (CC BY 2.0)

Image Credit: Medill DC (CC BY 2.0)

Earlier today the Dow industrials notched an all-time intraday high and now seem poised to exceed their record closing level of 14165 from October 2007. A record-setting stock market and an anemic economy? How does that make sense? Clearly Wall Street is all hopped up on “Fed steroids” rather than fundamentals, says USA Today.

Maybe not. Economist Mike Darda of MKM Partners notes that to reach a new high in inflation-adjusted terms, the Dow Jones industrial average would have to rise to 15,397.5, about 8% above its current level.

More importantly, the Dow hasn’t “really climbed much relative to two important nominal aggregates: profits and the money stock,” as the next two charts show:

030513dardamarket1

030513dardamarket2

He also notes there’s been ”a very tight linkage” between jobless claims and stock prices, showing the market is keying off fundamentals.

 

12 thoughts on “The 2 charts that bust the myth of the Bernanke stock market bubble

  1. POP goes the BUBBLE!
    The Elites MANIPULATE the market with the help of the Fed. The Elite will soon CASH OUT, taking lots of profits (maybe not as much as they could get but they bought back in when the lemmings sold off when the last bubble burst and will be making plenty) and popping the bubble that will drive prices back DOWN again. Then, as usual, they will buy back in low, TAKING (not technically stealing) the money from the lemmings AGAIN, to repeat it again and again and again and ….

  2. This is a ridiculous observation for several reasons. One, the market has never before been this high relative to a full set of key economic indicators that are in bleak, quasi-recessionary ranges. Two, equity markets are broadly up, with correlations to single stock fundamentals washing out. Translation: there is almost nowhere to be safely short in this market, which is not true of bull markets in previous fundamentals-driven eras. Three, interest rates, thanks to ZIRP, are at historical lows, driving money out of debt markets and into equities. This dynamic has nothing to do with equity fundamentals or some group-think about positive forward earnings growth.

    Granted, some significant productivity gains driven by downsizing have helped quite a few corporations and multinationals protect earnings and present reasonable multiples to the market, but in no way sufficient to explain all of the increase in valuation. Correlate Fed injections to Dow and S&P indices for a closer look.

    • I’d add that since very little business cash is being invested in jobs/equipment and individuals with money aren’t spending it, the money has to be parked somewhere… and with interest rates so low, other than one’s mattress, the stock market is about it.

  3. James, I had wondered about the communication mechanism for QE causing asset inflation. There is an interest rate/price inverse relationship. But the money supply has remained within historical norms. Excess reserves are not being leant. Inflation is muted. Money velocity is not increasing which supports and even demands accommodation. The Fed’s balance sheet is earning returns that are sent to the Treasury. The Fed has anchored expectations. And then there are the fundamentals supporting stock prices, low multiples, record profits, record % of financial assets on corporate non-financial balance sheets. Pent up demand for industrial equipment. Surging software investment. M&A activity accelerating, cheaper to buy than to build points to under-valuations. Commodity bubble deflating, possible point of peak farmland driven by increased agricultural productivity, technological innovations in mineral extraction leading to huge increases in supply, this has all the feel of a boom about to take place in the next 5 years and this is all the birthing pains.

    • A third chart, plotting stock prices against interest rates would tell a story of unintended consequences (ie, the Fed depressing interest rates to the point that stocks are the only game in town. For the moment.)

      • If this is true then why haven’t we seen a greater multiple expansion? But I agree that dividend paying stocks are more attractive given low rates for treasuries. But that is the obvious reaction of the investor looking for income. But there appears to be no relationship in percent change in equity value and interest rates. http://research.stlouisfed.org/fredgraph.png?g=ge8

    • But the growth in the monetary base is excess reserves which are not being leant. Ask the question when is high powered money not high powered? Answer: When it is held as excess reserves and not leant. How then can this money be driving the stock market higher?

        • The following graph shows the net increase in the monetary base not being held by depository institutions as excess reserves. This is the high powered money that the fed has injected directly into the economy or around $600 billion. Some of the planned purchases of MBS’s will end up as excess reserves and some will flow directly to Treasury. The stock market has surged in value by some $6 trillion over the past 4 years. That is 10 times the net money printing the Fed has engaged in. And M2 has grown faster in relation to GDP but money velocity has also fallen. Falling velocity was one reason the FED injected so much liquidity early on in the crisis to prevent prices from collapsing.

          http://research.stlouisfed.org/fredgraph.png?g=ggU

          • Steve, the Fed’s balance sheet has expanded from sub $900B to north of $3T today, and expected to reach $4T by the year’s end at the current rate of QE purchases. To say they only injected $600B into the economy is disingenuous.

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