Who said the economy is broken? And economics absolutely explain why equities are going higher. I have no foggy clue what you are talking about.
I also don't see the economy as broken. The stocks are going higher because the companies are making more money. And that may be because the Federal Reserve (essentially) printed more money. So some part of corporate profits, or all of it, may be due to artificial manipulation by the Federal Reserve. But it's still higher earnings and the stocks have to go up because of it. I suppose that eventually the Fed will take the money out of the economy but even assuming this, it does not follow that stocks will go down. The Fed probably won't take the money back until corporations and rich people start spending money. And at that time, corporate balance sheets will move from being "cash heavy" to being "newly purchased asset" heavy. They'll still be heavy and stocks will still be high. Of course this assume that interest rates stay relatively stable. But what really matters is interest rates. But when I look at rates right now, there's such a huge difference between corporate and US that I can see the Fed tightening quite a bit without necessarily raising corporate interest rates.
The original post alludes to the "Carry Trade," borrowing in USD to buy Risky assets, here Equities. QE was specifically designed to promote Carry, and whenever the Equity markets have paused the Fed has gone out of its way to promise monetary policy will stay loose. The OP basically has it right. And, as for corporate profits, theses have risen primarily on lower costs, especially interest rates, and not higher sales.
I suspect you know a lot more about this, None Business, and I appreciate your comments. I don't buy mutual funds, just stocks, and what I find strange is that I don't seem to have any difficulty finding what I think are reasonably cheap stocks. Regarding P/S, of course there a bunch of reasons a stock can become more valuable in the absence of rising sales (per share). One way is if they are building up a pile of cash or paying down debt. That would show up in price per book, but I hate relying on P/B because book values are so divorced from reality One thing I could do is to see how the amount of cash (or near cash) owned by corporations has changed over the past 20 years and subtract that difference from their market value. My understanding is that the velocity of money is way down and this is why the Fed has printed so much money. And I think I read somewhere that a lot of that money is in corporations. So this could amount to some part of the high P/S ratio; corporations 20 years ago had less cash on their books. For example, MSFT is about $40 per share but they have about $10 in cash per share. And low interest rates means that MSFT earns *less* not more. Ford is selling around $16 per share and their cash per share is about $6. Other stocks don't have so much cash, for example the next two I type in are GE at $26 and $1, BA is $134 and $14.
The velocity of money is indeed at an all-time low and not only does QE not fix this it's making it worse. QE is expanding the monetary base by giving free money to those least able/willing to spend it. There is no churn. It's "trickle down" on steroids. I'm not suggesting stocks are expensive by historical measures, simply pointing out that the improvements in earnings have been the result of lower costs of capital rather than raising the amount of sales. And, if you get outside the non-earnings tech world, most stocks are trading around 19 times actual earnings, or a 5% embodied yield and with some risk. This may be cheap in this rates environment but psychologically it is not cheap, as we tend to believe most people discount the future by 5% versus the present and are marginally indifferent to a 5% rate of return. As for MSFT, and other tech stocks, as for the yield on cash, there is no tech company I am aware of that does not benefit greatly from QE, the share price gains more than offsetting any lower yield on cash instruments. Remember, a lot of this cash may be held overseas to avoid paying taxes on it.
There has never been a correlation between the economy and the stock market and why should there be? They operate in different time mechanisms. The economy exists in the present and the stock market is discounting the future. Has nothing to do with anything being programmed. And the Fed hates this equity rally. Because the higher stocks go, the less leeway they have to keep rates low. But keep in mind, from 1998 to 2013, over that 15 year span, stocks went sideways in one big trading range. That is a very long time. Meanwhile wealth around the world increased exponentially. It was only a matter of time before that wealth made it's way back into stocks once we broke out through 1500. I still don't understand how the economy is broken. If anything, our biggest downfall today and more so in the future is that we are becoming too efficient. In economics you learn that efficiency gains come at the expense of equality. In other words, the more efficient we become, the greater the equity gap between the wealthy and the poor. We are actually an economic machine on steroids. We have found every dollar of mis-allocated capital and gotten rid of it. Remember something, great wealth is created through "inefficiencies". This is how we make money trading. And this is also why trading has become extremely difficult, because the inefficiencies are becoming less and less. This is also true for the overall economy. And it's also why money is flowing into emerging markets, because that is where the few remaining inefficiencies are.
Can you explain to me more about this 'In other words, the more efficient we become, the greater the equity gap between the wealthy and the poor." and why "great wealth is created through "inefficiencies"? Just give me some enlightment.
that's right, the market knows just one direction now. It will be interesting what will happen first a) the next crisis with DOW falling to 5,000 again b) hyperinflation, national bankruptcy in europe and the lack of investment opportunities making the public and novice crowd jumping on the bandwagon and getting the DOW to 100,000 we'll see
This might be a long response and I don't want to leave you hanging. I'll try to explain this in detail this evening. It's an extremely important concept to understand in economics so it deserves more then a one line response.