This is why the stock market is reaching new dizzying heights. The Fed’s money printing has both inflated corporate profits and provided plenty of cheap cash for company’s to repurchase their own stock. These share buybacks in turn raise EPS prompting more buying as stocks become “cheaper.”
Companies have no reason to invest extra cash into expanding operations, because the level of demand does not warrant it. Instead, they squander these windfall profits repurchasing shares when they are close to their all-time highs. Of course, C-suite occupants will benefit, as they artificially raise EPS and therefore their compensation.
A sudden stop of QE would be too violent for the market, but even a gradual tapering will create a market swoon. Neither of these options is really on the table. The labor market remains weak, and inflation is low. These two factors give the Fed political cover to maintain money printing to inflate markets and line the pockets of the fat cats with windfall profits.
The chart above is a reminder of what happens when the Fed stops printing money or talking about printing money.
No matter what the king and the oracle say, the fact of the matter is that the Fed is buying $85bn worth of bonds every month while the Treasury is being forced to reduce issuance due to a decreasing U.S. budget deficit. For the immediate future, supply will decrease, and bond prices will continue their rally.
Whenever a catastrophe is unfolding, there are always positive signs. Greece is a country of over 11 million people, and I am sure that at least a few thousand Greeks are doing well despite the ongoing depression. This does not mean that Greece is recovering.
I have been writing about the Eurozone Recovery Meme since it began appearing in the mainstream media in November:
Note that the Eurozone has actually sunk deeper into recession in the last seven months. Greece is no different with its economic contraction remaining above 5% per quarter for the last six.
The Yen has ceased its downward descent for now. As Japan’s trading partners play catch up in the race to debase, Japanese growth will level off. For now, everyone can pretend that this time is different and bid the Nikkei 225 through the roof.
The story with the precious metals is that speculators have decided that there is no longer a profit opportunity here. Industrial and retail demand are holding up, but with the speculators exiting the market prices should remain depressed until the next cycle begins.
The problem with running a tight fiscal ship is that investors will begin to view your country as a haven. Capital flows into a haven increase the demand for its currency ultimately damaging its export markets as its goods and services become more expensive.
To counteract this effect, the central bank can lower interest rates, but if the country is running high inflation this policy tool is unavailable. Sweden is currently in a deflationary environment, but it has little room to cut rates from a rock bottom 1%.
The money printing from the world’s central banks affects every country in a different way. Small, export-oriented economies have one batch of problems and the developing countries have another, deflation versus inflation.
The point this article succinctly makes is that the Eurozone situation can change in an instant. Argentinians overwhelmingly supported the peso-dollar peg until they didn’t. Argentina endured a deep recession lasting about a year after devaluation followed by a steep upswing in economic growth that erased most of the economic decline of the previous five years in about two years or so.
Eventually, European politicians in the periphery will begin speaking of exit, and a frustrated electorate will start listening.