On Thursday, May 9th the major equity indexes made new all-time highs. The rally off of the financial crisis low has been impressive and some view the market as poised for a further breakout while others see impending doom.
The first thing we can conclude is perhaps the stock market is not a good barometer of the overall economy. The deeper message, I think, is that we continue to live in a backwards world with misplaced priorities and illogical actions.
The rally off of the March 2009 stock market low has been the most impressive of all time. Equity index values grew faster than in the second half of the 1990s but nobody would mistake the economy of the last five years with that of the 1990s and some experts would argue that we are still mired in recession if not depression.
So why the all-time highs? Well the Federal Reserve is in the midst of Quantitative Easing 3. The Fed already had performed two rounds of QE and last year pledged an open ended QE where they would continually buy long-term interest rates indefinitely to keep rates down. This all comes after they created multiple facilities for banks to offset its toxic derivatives positions and lowered the Fed Funds rate to zero and kept it there for almost five years. Most analysts attribute a large portion of the market’s strength to this.
This begs the question what is good for the market and what is good for the economy? If the economy improves more rapidly, the Fed will pull back on QE, which probably will result in a large sell-off. And if the economy slows again, ensuring unending QE, well buy stocks. While one would suspect that a growing economy would eventually be reflected in market prices, the tail wagging the dog nature of current economics does not seem to be serving us well.
Gold guru Jim Sinclair explained it when I interviewed him more than a year ago as perception being reality. “The method of applied economics since Nixon is management of perspective economics: If the public perceives business is improving it will improve,” Sinclair said, adding, “Therefore, [if] you can keep equity markets high, you should be able to manage the economic perspective of economic decision-makers.”
Sinclair refers to it as the new school of economics: management of perspective economics or MOPE and says it is practiced everywhere.
Perhaps I am a mope for not understanding but it seems downright mopey to synthetically prop up the stock market in order to fool people into thinking they are better off than they are. Why not try more direct stimulus?
More on MOPE, the Fed and equities to come.