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Marc Cuniberti: A shower of money is the reason

Continuing along a familiar theme, investors are still asking me what may be up next for the markets. Many are fearing a crash, having witnessed an historic and record setting run since the third week of March 2020, when the 38% correction in the Dow came to a surprising end, having fallen that amount in a mere three weeks. No doubt, the speed of the COVID crash was historic in itself, and downright frightening to those that didn’t have stops (predetermined sell points) installed in their portfolios.

Not as fast but just as spectacular was the rebound that followed and continues to this day. This prolonged snap back rally has taken the Dow from its March 2020 level of around 18,000, to over 32,000 this month. Almost 12 months to the day and the Dow has risen more than 14,000 points. Not quite a double but comparatively historic, to say the least.

It has become obvious to investors and non-investors everywhere that the market is not the economy. At least not since COVID decimated the markets to historic lows, and then elevated them to astonishing new highs, all within a 12-month period. Truly, an event that will not soon be forgotten and likely talked about in schoolbooks for years.



So what is to explain an economy, devastated by a pandemic, which simultaneously spawns one of the fastest rising markets in history?

In a previous Money Matters musing, I suggested the forward-looking propensity of investors to see past the gray of recession and instead look to the wild blue yonder of economic recovery. Surely, this had something to do with the rise in markets. After all, with Main Street shuttering businesses up one block and down the next, there was little rhyme or reason why stocks would only fall for three weeks, only to then take off like a rocket while the nation was still in the beginning stages of the mandated shutdowns.




To think that the hopes of recovery could power this market to where it is now would be missing a much bigger picture.

Simply put, rising markets take money. And the amount of money it takes to lift a market as big as the U.S. market (as well as almost every major global market with it) from the depths of where they were, to new heights in a little under a year is certainly an historic amount of money, of which the amount can only be guesstimated.

What can be said is the current value of the U.S. stock market is somewhere around 87 trillion. During the March 2020 COVID lows, it was worth about 50 trillion. The difference is 37 trillion.

So the question becomes, where did the 37 trillion come from in order for to feed this type of valuation gain?

Various mechanisms allow for extreme leverage on Wall Street. This means to boost market valuation by 37 trillion does not actually take 37 trillion. But it does take at least a few trillion, and the only entity that has that amount of fire power is U.S. government. Not that they have a couple of trillion lying around. They don’t. In fact, they’re in debt up to their eyeballs. But what they do have is a printing press, and the ability to borrow. 

But buying stocks is not in the Feds mandate, nor is it even legal. So how do we explain the cash infusion that was necessary to drive the market up 37 trillion dollars when the Fed is the only entity with that much cash but is forbidden buy stocks with it?

If you recall the government has instigated more than a few bailout and stimulus programs in an attempt to stave off the economic effects of COVID-19. Like the 2008/09 programs, which also caused historic market increases (the market nearly tripled), once again oodles of money has obviously found its way to Wall Street. Like the 2008/09 programs which showered much of the funds into the financial sector, a greater proportion of the COVID bailout funds are again aimed at Wall Street by design, the reasoning being (again) that the financial system needs protecting. Couple that with interest rates being in the dirt making credit extremely cheap, the answer to where all the money came from is pretty obvious.

The Feds have printed it, borrowed it and then fire hosed it onto the economy. Some did go to you and me, but a lot more went somewhere else.

Marc Cuniberti holds a degree in Economics with honors from SDSU, is host of Money Matters Radio on 66 radio stations nationwide and has appeared on NBC and ABC and in a host of TV documentaries about his economic insights. The opinion expressed are Mr. Cuniberti’s only and may not necessarily reflect those of this media outlet, its staff or underwriters.

 


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