Of course, mono-causal explanations like "it was all thanks to loose monetary policy, a rally built on sand" never explain a complex system 100% but they do quite well in this case. The correlation and timing is spot on (see chart 8 below, I already presented this chart in an earlier Instablog entry).
I wonder what happens to this correlation when the FED steps off the gas...
(Source for both charts: "From Inflation To Deflation ... And Back!", Gluskin Sheff paper, August 2013)
In similar wording over at blog ZH:
Five years after the "recovery" began, the Fed continues to monetize more debt as part of QE3 than at any time in history, and certainly more than during QE1, Twist, and QE2, as can be seen on the chart below (remember: all that matters is the flow, as we noted well over a year ago, and as even the Fed has finally realized).Why is this important? Because as even the Treasury has now admitted, the Fed's daily liquidity injections are all that matters. Of note: in the just completed week, the Fed's balance sheet increased by over $50 billion (again, in one week), by $100 billion in the past month, and by just shy of $1 trillion in the past year. Incidentally, this is "money" that continues to not make its way into the economy, and every single "reserve" dollar created by the Fed in exchange for monetization, is used by banks to ramp asset prices to now daily record levels.
A $4 trillion Fed balance sheet, which is where it will be on December 31, implies 1800 on the S&P.
So, will that be it? After all, Ben Bernanke at least hinted at changes to come back in May and June 2013 (and the markets quickly sold off).
Now, some critics wonder if the FED ever will slow down or completely stop its asset buying splurge thanks to the "dovish" Janet Yellen nomination ("QE Infinity", here we come ?).
Interesting times ahead in 2014 and 2015 - when statistically speaking the latest (stock *) boom cycle time should be coming to a halt. The Shiller P/E ratio also doesn't imply the market is still cheap (quite the contrary...):
( Source: blogs.wsj.com/moneybeat/2013/07/23/have-.../ )
Please note that I'm not a perma-bear looking back in anger or about lost missed opportunities. I played along on the long side since late 2008 (as people say, never fight the FED).
But after over four years with little positive spillover in the real economy, it's time to take a step back and wonder where and when this rally and monetary policy will end (ugly) in the coming months.
Very short-term all seems well, the debt ceiling deadline got a patch unitl 2014 and the end-of-the-year rally might be on:
As I write these lines, GOOG** is hitting a symbolic 1000 USD and a Petsmart executive is praising "temporary tattoos and feather treatments" for spoiled animals on CNBC. Meanwhile, house prices are again soaring in key markets - as if the 2003-2007 bubble never existed. A litte later, a "new kind of high-end house flipping trend" segment is shown on the same financial network. All on the same day. I'm not making this up...
Chances of 2001 showers and 2008 storms aren't too far off in my stock market weather report for 2014-2015.
PS: There are people who think that the Shiller P/E is (no longer) a relevant ratio to measure how expensive stocks are. I do not agree and think it's quite valid, see for example here:
So, according to Cliff Asness, despite the recessions in 2000-2002 and 2008, the real ten-year average of earnings used in the Shiller PE is slightly above its long-term trend. Note that the current Shiller PE multiple of 23.5 is also about 42 percent above its long-term average of 16.5. Together, these two observations make the market look very expensive indeed.
* Remember: Only rich(er) segments of the population with lots of assets are better off or back to pre-crisis watermarks. "Normal people" with few or no assets to invest certainly are not in most countries around the world.
** Consider that GOOG is still quite "conservatively" (always relative) valued compared to most of its peers in techland except for maybe AAPL, that even adds more symbolism.