Not covered: QE and stock prices

Welcome back to Unhedged. It’s three days, and the bulls and bears are already at war on my entry boat. Thanks for the feedback. Send an email if you want to enter the level: robert.armstrong@ft.com

QE and share prices (first part)

Jeff Gundlach, a very famous bond manager, he said this recently:

“The Fed has grown its balance sheet and we’ve had relationships with the S&P 500 value in effect a few years ago since they started quantitative easing, and it’s almost like the law of physics. If you take the S&P 500 capitalization and divide it by the Fed’s balance sheet, it looks like a constant.”

Gundlach is clearer than me. That’s why he’s rich and I’m a journalist. And he’s metaphorically here. But when someone suggests, even metaphorically, that the market complies with the laws of hard science, we should immediately press the red skepticism button.

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

This relationship is not ongoing, only since last year. The two lines move in the same direction, but at different speeds. The market rose very quickly with a huge first round of assets, but it rose almost quickly, even as the Fed’s buying slowed. That’s obvious, but someone has to get it, and now I’m that person, apparently.

Here’s a look at the long-term relationship:

Even the two lines do not follow the customs in the same direction! After the crisis of 08, the Fed crushed the gas and the market fell a bit. And between the mid-17s and the mid-19s, the Fed reduced its holdings and the market rose, albeit irregularly.

At the same time, the relationship is strong and important, right? Well, the President of the Faith says no. Here is Jay Powell in his last press conference when asked if the market foam was on the radar:

“There is foam in the market, and I won’t say it has anything to do with monetary policy. . . but it has a strong connection to vaccination and the opening up of the economy – that’s what the market is moving about. “

This is stupid technical sense About the “bulls” suggested by Harry Frankfurt. He is not lying. The explicit factual content of his statement (“fiscal policy is not an important contribution to market foam”) does not matter in one way or another. He is setting expectations for his actions. The implicit message is: “Unemployment and inflation are all that matter to me; the market can put green mud sources like Linda Blair Exorcist and I’m not going to do anything. ”Everyone knows that’s the message, and he doesn’t allow it to be explicit, and that’s okay.

But we know that Powell underestimates things. Here is John Hussman, a very famous bear, with FT raw and accurate Description of the operation of the QE-stock price mechanism:

“Central bank asset purchases work by removing interest-bearing securities from private hands and replacing them with zero-interest base currency. . . increasing the discomfort of investors who must have that basic money without any interest. The moment this liquidity is tried on the “stock market”, it is immediately taken out of the hands of a “seller”.

QE means there is more money around. Sometimes it makes people feel like they have too many things, compared to other things they may have, such as shares. So they exchange money for shares. But then someone else has the damn money, and they even exchange it. The potato is hot, but with money. Increasing priority for things other than money raises the price of those things.

This is a better explanation of the relationship between QE and stock prices “If the prices of the Treasury fall, QE lowers the discount rates of future cash flows of shares, increasing their price.” This explanation may be true, so to speak, but this kind of tidy talk encourages the idea that stock prices are set on a giant celestial spreadsheet, full of objective inputs. It’s the envy of physics again. Stock prices are not tied to the laws of matter, but to the uncertainties of psychology.

More on this tomorrow, unless there’s a lot of news happening.

A good read: Buffett and Wells

This is my colleague Eric Platt new How Berkshire Hathaway threw away most of the rest of Wells Fargo’s shares. The bank was once Buffett’s favorite before the 2016 fake accounts scandal and before management gave an initial response to it. The news of Berkshire came before the Wall Street Journal declare other investors are “pouring into bank stocks like never before” as a stimulus and a game of rising inflation.

Wells Fargo is cheaper in price / book material than Bank of America, a bank that Berkshire still owns a ton. It is at the center of a program to reduce costs that should increase profits in a few years. Someday the regulator will pull them off their backs to grow back. It looks like a classic Berkshire stock. Berkshire has a broad portfolio and makes these choices for all non-essential reasons. However, I wonder what is going on.