This time is different?

I’m a huge fan of John Hussman and his models.  Go Blue!

However, I’m wondering how he accounts for the Fed balance sheet. Probably everyone else in the financial world and economics has already noticed this, but I had somehow not made this connection.  I am only displaying my ignorance to the world here because I want to save these graphs.

Here’s a graph of P/S for the Dow, published 3/1/17 by Danielle Park:


Note the big spikes during 2009 and 2013.  This graph really doesn’t match up with the Shiller P/E graph all that closely.  Park noted in her article that P/S is a less easily manipulated ratio.

Now compare to the Fed balance sheet:


There’s some pretty good correlation of money flows.  Fed issues dollars, dollars go into stock market as straight value inflation.

The takeaway here isn’t that the stock market can’t go down, but that analysis based on historical valuations may not apply, or may need adjustments based on central bank balance sheets.  It might be a good idea to look at other central bank balance sheets as well.  Japan’s central bank buys Japanese stocks directly, so that would have at least an indirect impact on other global markets.

Another takeaway is that the Fed may never actually reduce their balance sheet, because it would decimate both the bond market and the stock market, while also forcing interest rates up.


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