Free: Stock prices and cash flow


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QE and stock prices (part two)

Here are the two lines that mostly go to and from the right:

The two lines are the M2 money supply (cash, deposits, money market accounts) and the S&P 500. The M2 is rising sharply due to a lot of comfort: the Fed buys securities for cash, thus placing there was new money. Why the S&P is rising so fast, is less clear. The fact that the two lines came together in the present era inspires a popular causal story: “The swineherd is printing money, and it has to go anywhere, and it has to go to the stock market. . ” A couple of days passed noticed that these causal stories are wrong, because money is not converted into stock. If I buy parts, the seller gets the money. It’s not “in the stock market”.

What’s really happening is that all the more money laundering that people want less of it, has to do with stocks, and the increased demand for stock forces splitting prices. That’s how QE affects stock prices (or a way it does; some people, especially central bankers, like stories about QE lowering the discount rate, which is more dali.)

Eric Barthalon, the world’s leader in capital markets research for Allianz Research, finds that this process is self-limiting. As equity prices rise, the weight of money related to equities in investors ’portfolios is now going to a level where investors are happy. Investors stopped trading more, and prices continued. In this story, it is not the pig farmer who fills the money markets. There is a key factor: the investor’s desire for money.

Barthalon’s reasoning – I find it convincing – is that (a) investors ’desire for money is not stable and (b) the Fed has no control over it at crucial times, that is, when the markets ruined. You can follow the unstable desire of investors for money by looking at the speed of money, or how it changes hands. Barthalon told me:

“It is not the abundance of money but its circulation that causes the rise or fall of property prices… And historical experience has shown us that central banks cannot control the speed of money, especially the markets. capital. ”

Now we see why central bankers might like the idea that in QE, they control the discount rate that determines the value of stocks, by continuing to shorten yields on government bonds. Because the lever, in theory, will work even if investors suddenly decide they want the money a lot – which they do when markets fall.

Here is Barthalon’s long chart of the stock market money rate (the amount of daily market transactions divided by M2) versus the stock market price. See how the market’s downturn has slowed:

Those two lines go together, and relate to a clean causal story. What is taken is that most of the money floating around cannot, on its own, keep the stock market high.

The Dept of Armstrong is wrong: bitcoin

Yesterday I argued that bitcoin is more thought to be the rationale for a company whose only asset is unproven technology. That technology will prove itself when money becomes money. But bitcoin is not money today because, while it is traded by people, it is not widely accepted as a form of payment, it has few transactions, high transaction costs, and so on.

The most common response I receive is that bitcoin is not trying to be money. There is money in two important currencies. It is a store with value and a medium of exchange. Most people who think I’m wrong think bitcoin is all about saving value. That’s why it’s so important to give it a try. If the sale is a bit expensive, a bit bad, and so on – who cares. These are similar to gold and diamonds, commodities whose visible appearance is their uniqueness and what they love, not their ease of use.

I am not convinced. Gold and diamonds have industrial and jewelry uses, they have millennial conventions that support their preciousness. The only thing that supports bitcoin as a store of value, as a valuable commodity, is that it can be both a store with value and a labi na good exchange medium – one that can operate wide, without friction, at minimal cost, and (here’s the real key) without third party oversight or government control. And I don’t think we know yet that it really is. Bitcoin is scarce, but so are the watercolors I painted in high school. They don’t make that a storehouse with value.

Likewise, bitcoin-heads should sign up for #fintechFT, our newsletter at the intersection of tech and finance. Clicking HERE.

A good read

I hit on it The Bloomberg story about how strong U.S. home demand is as homeowners are moving away from fixed prices, making blind auctions to ensure the most possible bids:

“A clash of forces related to the pandemic [is] holds new inventory when it is absolutely necessary. Buyers are stamping for new homes because remote labor increases employment, while rising wood costs and a shortage of workers slow down construction. ”

This description suggests that there is no toxic assumption of the 2007 style in the mix. I’m paranoid. Isn’t the speculation anywhere in these times? Why not live? I don’t know if there’s any evidence there, but I’ll take a look. If you have, email me.

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