Whoop-de-doo and jump for joy! US stock indices are advancing to new highs, with the DJIA moving above 16000 for the first time ever. This has triggered a certain amount of soul-searching on CNBC and the like, about whether things are getting just the teensiest bit bubbly here. The general conclusion: Naaah! Valuations are in normal ranges, companies are sitting on piles of cash, and so on.
But what's driven the markets to these fresh highs? Just last week there was a very disappointing Empire State report on the factory sector, and incoming Fed Chairman Janet Yellen told her Congressional inquisitors that the national unemployment rate, at 7.3%, is still too high, so it can't be economic fundamentals that are moving the market.
The upward pressure on stock prices is, of course, driven by the likelihood that the Fed, under Ms Yellen's guidance from January onwards, will keep its QE program running full-tilt for several more months. Whether this is really needed at this point in the recovery is debatable, but what's beyond dispute is that ultra cheap money leads to an increasingly desperate search for returns, which in turn leads to the mispricing of assets, setting the stage for the next financial crisis.
So it's worth repeating that we'll only know whether QE has been successful, other than as a Band-Aid, when we see how the global economy copes without it. Right now, we still don't even know how the Fed expects to bring about the long-awaited "taper" of its asset buying program. The higher stocks go, the greater the likelihood that the taper, when it comes, will be messy.
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