Tuesday, November 25, 2014

How QE Money Ends Up in the Stock Market

Sometimes I like to connect the dots for my readers or for those of you who "know" something is happening, but don't know precisely how.  So today we'll be looking at how QE money ends up in the stock market, thereby increasing PE ratios and making nothing worth buying!

So the first step is where the federal reserve is faced with the fact that Keynesian stimulus is failing, specifically monetary policy only affects inflation and prices and not real economic growth.  Egos and heads explode at the fed because they're "economic geniuses" so they can't be wrong!  So they lie to themselves and say they just "didn't do enough of it" and go onto fire up the printing presses.

But what to do with the money?  They don't want to cause "inflation" but they still want to "boost the economy."  So what they do is buy US treasury bonds, sometimes directly from the US treasury, but other times from banks and other financial institutions that are looking to get rid of that paper.  But it's not just US treasuries they sell to the sucker fed.  They unload their crappy junk mortgage backed securities to the fed, as well as their overprice stocks.

The proceeds of these purchases go into the coffers of the commercial bank and other financial institutions that sold those worthless pieces of paper securities to the fed.  And what do they do with these hundreds of billions of dollars?

Why they invest it in the stock market!

And yes, it really is that simple junior, deputy, aspiring, official and otherwise economists!

Of course the increase in stock prices is not considered "real inflation" because...well...fed economists said so.  So you go right ahead and max out your 401k contribution buying overpriced stocks with a PE of 27 and a dividend yield of 2%!  It's patriotic!


Grey Enlightenment said...

I agree with most of what you write but I disagree here. ..The fed ended QE and yet stocks still keep going up. It's been over a year since the fed began the taper and stocks are up 30% since then, which kinda throws water on the whole 'QE propping up stock market' theory. Stocks are surging because of economic fundamentals like consumer spending, exports, profits & earnings...stuff like that. Also, the PE ratio of the S&P 500 is only 17 or so, not 27.

Anonymous said...

Grey Enlightenment:

You're forgetting that this is a global thing so even though the Fed has ended (for now) it's printing operation China, Europe and Japan have doubled down on theirs. That plus global capital flows which are fleeing higher risk markets (or negative interest rates like in Europe) are also crowding into both the US stock market and the high end housing market. This is also why the dollar is pushing higher as capital moves currencies shift so people are running away from Yen and Euro based assets towards dollar based assets.


sth_txs said...

Economic fundamentals? Seriously?


Anonymous said...


That haven't ended QE regardless of what they say.Sales are the crapper big time Walmart and mcdonalds have lowest earning in l long time the GDP was negative at the beginning of the year

The QE goes to the banks. The banks lend it at low interest to the corporations. The corporations buy their own stock with the money. This causes them to show inflated earnings per share and so they beat estimates. The suckers pile in, the market goes up. QE ends, the companies stop buying back their own stocks, they start missing earnings forecasts, the market crashes, game over.

Anonymous said...

aaron, WHERE did you get a pe of 27? multpl.com has it at 20, which is a long way from overpriced.

I read an article today of yahoo finance about how robert schiller invests in the stock market. he say's he thinks it's a bit pricey, but "you have to put your money somewhere".

for all it's perceived problems, the stock market may very well be the best game in town.

Anonymous said...


I find it strange that it doesn't get into the precious metals and other commodities market.

If I was handed over a lot of easy money, I would want to convert it into real stuff I can count on.

I find it strange that banks don't massively buy precious metals as a collateral to their free money.