onsdag 3 december 2014

The obvious answer to why stocks keep going up both with weaker and stronger economic data

There is a convincing theoretical base for rising stock markets
  • Weaker data means more QE* or QE and ZIRP* for longer
    • The economy is not affected by QE (wealth is created by production, not by coloring pieces of paper or adding zeros to digital ledgers)
    • The economy moves through cycles and will repair itself sooner or later, no matter what the central banks do
    • Once the economy improves again, presumably on the same date as it would anyway, without QE and ZIRP, there will be more money sloshing around to pay for goods and assets. Consequently, future asset prices will be higher than they would have been without QE
  • Stronger data means the recovery could be here already, i.e., sooner than expected, and stock prices rise due to the positive surprise

-Sounds good, right?

-However, what's missing from the above is:

Destroying the value of money ruins the economy

  • Money printing does affect the real economy..., unfortunately negatively:
    • MP exacerbates risk taking and moral hazard, encourages speculation, leads to search for yield and malinvestment, investor disillusion, crowding out of sound investments. MP thus reduces potential and actual growth and postpones the economic recovery
    • MP sets the stage for inflation once the economy improves
  • In short, MP pushes the economy toward stagflation, with higher inflation and lower growth than without MP
  • During stagflation, both profits and valuation multiples are lower. Stocks should fall when the risk of future stagflation rise, even if it's 5 or 10 years out, since the de facto duration of stocks is around 50 years currently.

To conclude, there are no free lunches in money printing either

*QE=Quantitative Easing = money printing
*ZIRP=Zero Interest Rate Policy
*MP=Money Printing
*malinvestment=investment in unproductive or unwanted/unwarranted capital, due to temporarily low interest rates making all investments seem better than just sitting on the money

2 kommentarer:

  1. Hey man,

    I enjoy your non-financial/trading articles. Was wondering if you could make a article about your favorite and recommended books for men?


    1. Hi


      I will write about my favorite and my recommended books. I can't promise it will be a "books for men" list though.

      On the other hand, I think that distinction is pretty subjective... I'm a man and the books I like obviously are for me, so at least it will be a "book for A man" list ;)

      FYI: The books I like are typically about technology and sci-fi, finance/economy, psychology and astronomy.