In the comments of this post, Gene Callahan doesn’t shirk his duty of constantly assuming I started reading financial economics last Tuesday:
But Bob, weren’t you predicting market disaster when the Dow was at 6000? (I was buying at that point, fwiw.) Weren’t you predicting it through the whole rise of the last seven years?
If I predicted the death of David Bowie every day for the last 7 years, do I get to crow this month when he actually dies?
If the Dow gets back down to 15,000 it is buy time again. Do you want to write a derivative contract on whatever position I take so you can short my position?
No, I don’t think I was predicting a stock market crash when the markets bottomed out in March 2009. I’m not betting my life on that, but I don’t remember doing that. I think instead what happened is that I was adamantly against the Fed’s policies from the fall of 2008 onward (actually from the fall of 2007 onward…), and then when various mockers pointed at the booming stock market as proof that guys like me were idiots, at that point I started saying the boom in equities was built on quicksand. However, if Gene can find me saying the stock market was overvalued in March 2009, I will note it here as a correction.
Now, the broader issue is that I don’t think I’m grasping at straws, or merely chanting “Disaster looms!” when I say that the stock market (I normally use S&P500 but below I use the DJIA for Gene) has been driven by the Fed:
I want to be clear that Austrian theory per se doesn’t posit a mechanical connection between the stock market and the Fed’s balance sheet. I have been using that graphical device to get people to see that there is an obvious connection if you are willing to use your eyes.
Now if the connection holds–which it might not, for example if everyone suddenly thought I was a genius then the market would tank instantly–then for the Dow to go back to 15,000, the monetary base would be “only” $3.2 trillion, still 4x the height it was eight years ago.
Does anyone think that is sustainable? Maybe that’s what is throwing people here. I am assuming throughout this discussion that the Fed eventually has to let its balance sheet (as a share of GDP if you prefer) go back to pre-crisis levels. That was what Bernanke said in the beginning when he unleashed this genie.
Beyond that, I am really puzzled by how many generally free market economists (not saying anarcho-capitalists but people who generally respect markets absent a compelling reason otherwise) think that trillion dollar deficits, massive government expansion in health care and health insurance, regulations on power plants and potential big carbon tax in the wings, and the list of horrible presidential candidates all lead to a record breaking stock market. When Krugman celebrates the Obama Boom that somewhat makes sense, because he thinks what this economy needs is more government. But it baffles me how many generally free-market economists think the booming stock market of the last few years makes perfect sense.
Here’s the long term picture. I don’t see why people warning that the market is poised for a big drop are being treated like kindergartners.