Sep

11

BudThere is something missing in the article from Zerohedge.com, "Correlation Of S&P 500 Performance With Fed Monetization". The Quantitative Easing of buying $917b more securities went nowhere as shown by the big increase in deposits ($886b) at the Fed by the same institutions that sold the securities. They just left the newly created money sitting on the Fed's balance sheet, earning the modest interest that the Fed now pays. They didn't go buy stocks with it. Yes they could have, but the Fed balance sheet doesn't suggest that as a likely action. Furthermore, the Fed didn't really create new money for QE because many of their direct loans were paid down. The Fed balance sheet has been flat during this time frame. The banks, who had been paying interest on their borrowing, sold MBS and Treasuries to the Fed, and now are collecting interest rather than paying it. It would have to be some back channel of additional off Fed balance sheet funding to claim that the Fed is the source of money for the stock market rally IMO. Yes, it does seem that the QE lines up with the increase in stocks. Zerohedge suggests there is a multiplier on Fed money, and that could be the case. Then the big financial institutions would have to be borrowing, perhaps pointing to their big deposits at the Fed to justify big loans, to invest in the stock market. Maybe, but I haven't seen evidence of that either. I'd be delighted if the proposed relationship were valid as then that would explain the surprisingly big jump in stocks as being Fed monetization induced, since I still see great weakness in the overall economy that doesn't justify stocks rising. But the proposed link doesn't hold from what I see. Anybody else see how the link would work?

Dr. Conrad is chief economist of Casey Research and a professor at Golden Gate University.

Rocky Humbert offers:

Another possible explanation:

As part of QE, the Fed bought MBS securities from the open market, which reduced their supply and increased their price. This caused some marginal participants to purchase other, less expensive fixed income assets. In this case, corporate bonds.

The Vanguard Short-Term Investment Grade Bond Fund (VFSTX) has returned 12% year-to-date and the Vanguard Intermediate Investment Grade Bond Fund (VFICX) has returned 15% year-to-date. These are huge moves.

As the cost of corporate debt financing declines, it’s logical equity valuations should benefit.

Dr. Humbert is a quantitative analyst and speculator who blogs as OneHonestMan.

Our money and credit expert Rudolf Hauser writes:

From the Zerohedge article "And instead of this excess money hitting broader aggregates such as M2 or MZM, it is held by the banks, who proceed to buy securities outright on their own, either Treasuries or Equities."

When banks purchase securities they pay for them with those Fed created reserves. The person or institution selling those securities now has a bank deposit. The impact on M2 is the same as if the bank had made a loan. But if the high-powered money created by the Fed is kept at the Fed M2 is not expanded. In short the article is incorrect.


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  1. Steve Leslie on September 12, 2009 10:20 am

    There is a great line in the movie Rudy Rudy is praying in the church to get into Notre Dame and his priest-mentor walks by. He stops by to chat with Rudy. "This is it father. This is my last chance,if I don't get accepted this time Notre Dame doessnt accept Senior transfers. Is there anything else I can do?" "Son, in over 30 years of religious studies, I have come to two incontrovertible conclusions, there is a God, and I am not him." I have done this with stocks for over 30 years and firmly I have come to the same conclusions about the markets. That said, my contribution here is that capital is everything. "Money goes to Money" meaning it is always looking for a home. Sometimes logically sometimes illogically. The so-called psychology of the market is king. However one finds a way to quantify it will give one an edge in speculation. We are in new territory with the TARP money. Never has the government infused so much capital to help fund an economic recovery. I believe that the jobs number is the key this time. The question is will the government get it right enough to accelerate the economic recovery. Question 2 is will they not destroy by driving through a health care package that will crush everything. Lots still out there. Of course the stock market will see this out 9 months in advance.

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