Tyler Durden at Zero Hedge thinks so, and offers the following graph to illustrate the correlation:
Click to enlarge
Correlation is not the same as causation: I'd be a little happier about this theory if the mechanism could be explained. How exactly did the Federal Reserve's purchase of government bonds force up stocks?
I suppose the effect was indirect, in that the stock market recovered confidence when it saw that interest rates would be kept low with this extra demand for government credit, so making debt-fuelled market speculation cheap and easy. Also the fear of a banking sector collapse eased as the policy of official support at all costs became clear.
I guess the new bubble is in government credit, and will continue to inflate until a weak seam in the fabric splits. Keynes said, "Markets can remain irrational longer than you can remain solvent"; similarly, governments can stay irrational longer than you can afford to short their darlings. I'd be in no hurry to bet on a market reversal, even though it "should" happen and the present state of affairs is not tenable indefinitely.
Which is why I grit my teeth and hold cash.
