Whoa! Investors are acting like it’s 2007 all over again.
USA Today has the story:
‘NEW YORK — Emboldened by soaring stock prices and record-low borrowing costs, stock investors are taking out loans against their portfolios at the fastest pace since before the Great Recession hit.
‘So-called margin debt hit $379.5 billion in March, the highest level since July 2007 when such debt hit an all-time record of $381.4 billion, according to the most recent data available compiled by the New York Stock Exchange.
‘The trend signals that investors are more comfortable with stocks and are more willing to use borrowed money to buy more securities in hopes of garnering fatter returns in a hot market that has pushed the Dow Jones industrials up more than 15% in 2013.’
Why are investors so bullish? Because the economy is coming back? Because the future is rosy? Because stocks — whose earnings are already in record territory — are going to earn even more?
Nah…what do you take us for, dear reader? We know the story. Stocks are going up because the Federal Reserve is making them go up. Here’s David Rosenberg in Canada’s Financial Post:
‘The U.S. Fed has always been important in influencing trends in the financial markets, even if the economic effects have been far less than dramatic.
‘This influence has actually strengthened in recent times to the extent that the correlation between the Fed’s balance sheet and the direction of the stock market, which was barely 15% before all these rounds of quantitative easings began four years ago, is 85% today.
‘By way of comparison, the time-worn correlation between the market and corporate earnings has remained unchanged at around 70%.
‘The Fed is trying to bring the overall cost of capital down to a level that would be consistent with a -2.2% Fed funds rate, which is where the rate actually should be based on current inflation and the still-huge amount of excess capacity in the economy.
‘But the funds rate has been at zero for more than four years. The Fed cannot magically create a negative nominal interest rate, so it is using the powers of its balance sheet to achieve the same result.
‘This then brings me to my very last point, which is what I think was a critical inflection point when the Federal Reserve said in its December post-meeting press release that it will not budge from its 0% policy rate until the U.S. unemployment rate drops to 6.5%. It is currently around 8%.
‘We have done estimates based on various assumptions and found that achieving this Holy Grail likely takes us to the opening months of 2018 or another five years of what is otherwise known as financial repression.’
But wait a minute. If the Federal Reserve continues goosing up stock prices for another five years, isn’t that going to put stocks in ‘irrational exuberance’ territory? Won’t artificially low interest rates — over such a long period — create the same sort of distortions and bubbles that led to the crisis of ’08–’09 in the first place?
But the Federal Reserve is on the case. It says so right there in the paper. The Fed governors ‘are considering an exit strategy’. Exit from what? They are trying to figure out how to get down.
For four years they have been climbing up and up — offering loans at negative interest rates…trying to encourage people to borrow and spend. They want people to part with their money, not save it. And they’ve also given the economy more money — QE 1, QE 2, and now QE 3. In the current version of quantitative easing (QE), they print up an extra $85bn a month and pump it into the banking system.
That money hasn’t done much for the real economy — the unemployment rate has gone down, but only because people have left the workforce — but it’s done wonders for stock prices. The Dow has more than doubled since ’09. It’s up this year too — hitting record after record.
Ben Bernanke says he wasn’t targeting equities with his quantitative easing programme. But that’s what he hit…climbing higher and higher to get a good shot. Now, he’s sitting on top of a monetary pile that is four times as tall as it was in ’07.
And now, how will he get the Fed down without getting hurt? If stock prices are so closely correlated to Fed money-printing, won’t stock prices go down if they turn off the presses? And how will the Federal Reserve react when it sees stocks go into another major bear market?
Our guess is that as soon as Bernanke hints at cutting off the presses, stocks will begin to slide. Then, when the presses really stop, they’ll fall hard. That’s when it will get interesting. If the Federal Reserve can’t cut back now…how will it do so when the markets and economy are even more dependent on it?
Instead, the Federal Reserve will panic…and climb even higher.
for Markets and Money
From the Archives…
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The Greatest Wealth Transfer in History
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