Mercury Rising 鳯女

Politics, life, and other things that matter

If the Fed bails out the markets this time, they are fools

Posted by Charles II on June 4, 2012

It’s definitely look out below time in the stock market. And that’s a good thing! The S&P was in a minibubble, outracing other markets. Now it looks to print -1%, with Asia down 2%.

The stock market does not produce anything useful. It does serve to allow companies to raise money that they could not raise from bank financing. This is valuable for small companies who can’t borrow at the bank. But with interest rates low, big companies would be fools to issue equity instead of getting loans. The only important thing that a rising stock market accomplishes is that it enable the upper middle class/lower upper class to spend extra: to take a vacation or buy a Mercedes. These things actually do produce jobs, so a swiftly rising market is useful in the early stages of recovery.

In the real world, whole countries are suffering recessions. A few are insolvent. The stock market of those countries should not be rising in that environment. The US is doing ok, but the economy is soft. Europe is a disaster. Asia does most of its net trade with the US and Europe. There has been a stock swoon every summer since the crash for reasons that probably have to do with data artifacts more than real economic developments. And each time the Fed has responded to the whiners in the privileged classes with quantitative easing.

The whiners are back. If the Fed does QE it this time, they are fools. The market is roughly fairly valued based on present earnings. If, as seems likely, the world will re-enter a mild recession in 2013-14, then it’s overvalued. By 10% 0r 20% perhaps. Not by 50%. QE to raise asset prices will not fix the problem. The problem is that people need work, raises, better benefits. The problem is that the political system seems to be incapable of providing jobs, good wages, benefits.

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