By Charles Biderman
Is the Bernanke Put dead or alive? That is the most important question for the stock market today. And the reason is that all those bullish on the market firmly believe that Mr. Bernanke will stop this stock market from going down anytime soon. In other words, without the Bernanke Put, this stock market would be lots, lots lower.
Since the August 2010 low, right before QE2 was announced, the value of all U.S. stocks is up by 40%, $6 trillion, to $19.6 trillion today. Since the start of QE2, the U.S. government has run a $2.5 trillion deficit and the Federal Reserve has printed about $1 trillion, or say $3.5 trillion combined.
Not bad, printing $3.5 trillion and stocks are up $6 trillion. Unfortunately the overall economy has not done anywhere near as well as the stock market. While stocks are up $6 trillion, take home pay for everyone who pays income taxes is up by $400 to $500 billion, over the past two years. That, of course, is before inflation. And most if not all of that $400 to $500 billion in take home pay will disappear if the government doesn't keep on spending to seven to eight times as much.
Which is more amazing? That our government prints and borrows $7 to $8 to create $1 in additional after tax income? Or that very few people seem to care?
So without the Bernanke Put, this stock market would be toast. Remember, stocks are up a couple of trillion dollars from when the Wall Street Journal's John Hilsenrath in early June touted the coming easing, through when the easing actually occurred in the middle of September. But that's it. Stocks went up anticipating the easing.
How many of you know that stocks are actually down, not by much, but are still down from the day after QE3 was announced? I personally see nothing in QE3 that by itself will boost stock prices. All that is going on is the Fed is creating short-term money by selling repos and using the proceeds to buy longer-term mortgages. So yes, mortgage rates are down a bit, but interest rates on the 10 year and the 2 year Treasury are not down at all.
So how is QE3 going to create money going into stocks? In QE2 interest rates went down and money did go into equities. But interest rates are not going down here, so why are stock prices hanging in here?
In my humble opinion, the Bernanke Put is dead, but the bulls are making believe it is still alive. After all, the walking dead are a very popular part of today's culture. So why not in the stock market as well?