Stocks and the government

Startling news for investors, Yellen and Congress. Analysis: The bank for central banks says current monetary policies are outdated

Interesting article supporting my view that the markets are climbing due to inflow of money. Basically, more dollars chasing a fixed amount of stock shares equals higher prices. Some takeaways:

  • “monetary policy is testing its outer limits,” and that advanced economies, including the U.S., need “balance sheet repair and structural reform.” (Me: Our government is too self-serving to do what is needed.)
  • near-zero rates are no longer effective in rallying the economy, they have sent investors into equities. (Me: Yup. This is why the markets are at all time highs despite weak economy.)
  • “market participants are pricing in hardly any risks … a powerful and pervasive search for yield has gathered” (Me: Investors are being driven to stocks because you can’t get any return on CDs, etc.)
  • Currently, monetary easing happens too quickly during busts, and governments need to find ways to make the policy counteract the financial cycle so it does not exacerbate existing problems or add new ones. (Seems unlikely this will happen. Too unpopular.)

None of this is really new or a revelation. For stock market investors, the thing to watch out for is the time when the recent high-return-seeking investors get scared and pull all of their money out of the market. I think they have some stomach for small drops, but if we see a quick steep drop, it will be accelerated as funds are quickly pulled. I know I’ve got my finger on that trigger!


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