Can someone discuss the relationship between adding dollars to the system and rising stock prices? Yes, I did do a Search in this forum going back a few months, as I thought I'd seen threads to this effect, but, while not reading through every thread, didn't see anything in the titles that looked like it addressed this directly. Not trying to start a political flame war here, but just looking to have the arguments as to why adding dollars to the system might cause or not cause rising stock prices. IF this is the case, could it be that the rally, now a year old, is due more to this than any improved economic or corporate outlook? Thanks to all...
There are 189 countries in the world and except for US and afew others, no matter how much money you print, IT WILL NOT TRIGGER INFLATION thus stock prices and commodity and all other prices in USA is not effected. US has been printing money for decades in enormous amounts and inflation is less than %3 all the time. The reason being is that US dollars is circulated all over the world and the the whole world seems to be hungry for dollar and %75 of US banknotes are circulated outside USA. You have to visit a 3rd world country to see how people are hungry for US dollar. It is just unbelievable. As long as this hunger continues, we will keep printing US dollar and domestic inflation of any kind will be tamed.
While monetary injections aren't necessarily reflected in stock prices immediately.... stocks will eventually go up in an inflation-driven way if excess money supply is maintained. In the long run, NOT a good thing... as the rise in stocks is offset by devaluation of the currency.
more currency is enterring our system, and corporations have more cash on the books. Also, money is loose and investors are not moving towards cash investments or bonds. The money is going into the market, and I believe we're seeing the beginning of a bubble in stocks overall, and specifically tech stocks. It won't be a big bubble, but the added liquidity for no place to go will mean net investment into stocks. Be careful. Also, demand for the dollar, as well as the euro are decreasing. Continue to watch out for India, China, South Korea, Latin America, Middle east.
It is the combination of the increased money supply and low interest rates that are fueling the stock market rise. Banks can borrow money from the Fed for very low interest rates, then invest the money into quality companies paying good dividends. However, printing money and creating more debt lowers the value of the US dollar and decreases the desire of creditor nations to buy our treasury bonds in addition to fueling inflation. Therefore, the Fed will be forced to raise the interest rate on treasuries to attract buyers and to cool inflation. As interest rates rise, investors will be more attracted to the guaranteed interest provided by treasury securities and less interested in the risk involved in investing in stocks. If the Fed is forced to raise interest rates too much, it may cause the stock market to fall.
Read this thread in 5 years and you will see USD will have the same value after trillions and trillions of dollars will be printed by that time. Impossible? Wait and see
Perhaps stocks are rising in anticipation of rising inflation. So for example if a company had a market cap of 100 million it goes to a market cap of 120 million not because profits are soaring but because tomorrows 120 million will only buy you what todays 100 million will buy you. IDK. Not an economist but i play one on ET
Maybe stocks are rising because, a collapse of the long-term bond market, would also collapse businesses' existing debts, and make it much more difficult for competitors to grow capacity. Likewise, with the crash in real estate prices that is underway, particularly in CRE, many businesses will have a significant chunk of their expenses wiped out. Further into the future, I would expect cash generating businesses to actually go into the CRE market, and acquire the properties in which they do business. The business model of the past 2 decades has been to dump real estate into a rising market (RE valuations were so absurd that retaillers such as Sears had more $$$ locked up in real estate, than their entire proprietary businesses were worth!). This will reverse itself over time as all of the current CRE owners go bankrupt. Labour costs are also falling like a rock as well, which supports corporate earnings.