Washington DC has printed trillions, creating an epic stock market bubble
Excessive Money Printing Funnels into the Stock Market
27% of all US Dollars in Circulation Today have been Printed during the past Two Years
The money created by the government (debt) and the Federal Reserve bank (money printing) has eclipsed any period in history. Money in circulation in the economy (M2) stood at $15.5 Trillion in early 2020, since then the government has printed $6 Trillion, an increase of 38%. Of the nearly $22 Trillion in circulation today 27% of that total has been printed in the past two years. An unsustainable pace. (chart source: Federal Reserve System)
This has caused a dramatic rise in prices in the economy in general and in the stock market.
Dramatic Increase in Debt
The Federal Reserve Bank has increased it’s balance sheet through money printing to the tune of $5 Trillion and the US Government has added an additional $5 Trillion to the public debt. Both will need to be paid off by future taxpayers. (charts source: Federal Reserve System)
Trillions Has Flown into Stock Markets – Artificially Propping Up Prices
Of the $10 Trillion that has been printed, $1.6 Trillion has found its’ way into the stock market. This number eclipses any number in the history of the markets. Below Bank of America Research tabulates global equity flows, the $1.6 Trillion that has gone into stocks over the past 12 months easily surpasses the highest level of $295 Billion.
As you can see the 2021 return in the stock market is more a function of money printing than actual fundamental improvements.
The Federal Reserve is in the process of turning of the printing press because inflation is starting to get out of control. The US Government is also not likely to pass any spending bills any time soon. What happens to stock market prices with the money printing turned off?
Over the past 20 years $779 Billion has been invested in stocks, yet just in 2021 over twice that amount has been invested in stocks. Is caution warranted? Very likely yes.
Inflation, Stagflation, Volatility, Excesses
This excessive money printing has caused inflation and concerns over stagflation (inflation and prices rising in spite of a slowing economy). The level of cash floating around in the economy has caused shortages and supply chain disruptions. Anecdotally I saw on CBS News that price increases total almost $4,000 for the average American Family, we have all heard similar stories. In short it is bad news for 50% of the country which is on a fixed income.
The concerns over inflation, the expected rise in interest rates, the absence of government stimulus, and the end of money printing has created a lot of volatility in 2021.
The expectation is that investments which have benefit from money printing will be negatively impacted (for example, stocks with high PE multiples) [note: the money printer has been on full blast since 2008]. What is expected to do well are boring blue chips trading at reasonable valuations, large companies with a dependable earnings stream.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
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DEFINITIONS
FRED: Federal Reserve Economic Data – a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 500,000 economic time series from 87 sources. The data can be viewed in graphical and text form or downloaded for import to a database or spreadsheet and viewed on mobile devices. They cover banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, monetary aggregates, producer price indexes, reserves and monetary base, U.S. trade and international transactions, and U.S. financial data. The time series are compiled by the Federal Reserve and many are collected from government agencies such as the U.S. Census and the Bureau of Labor Statistics.
FRED M1 Money Stock - M1 is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. It does not include financial assets, such as bonds. The M1 is no longer used as a guide for monetary policy in the U.S. due to the lack of correlation between it and other economic variables.
FRED M2 Money Stock - M2 is a measure of the money supply that includes cash, checking deposits, and easily-convertible near money. It is a broader measure of the money supply than M1, which just includes cash and checking deposits. M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.
Price-to-Earnings Ratio - The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Total US Debt - The national debt of the United States is the total national debt owed by the federal government of the United States to Treasury security holders.
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