QE Keeps the Bull Running

04/02/2013 11:00 am EST

Focus: MARKETS

Mike Turner

President, Mike Turner

Eventually, quantitative easing will come to an end, but until then, Mike Turner of CycleProphet says the bull will go on.

Based on the Consumer Price Index, inflation is running at a very manageable 1.98%. But there is another form of inflation—one that is not often discussed. "Stock market inflation," or SMI, is directly tied to how inflated or uninflated share prices are for equities.

Directly or indirectly, the Fed's quantitative easing, printing trillions of dollars, is not finding its way into the economy. Much of that money is finding its way into the stock market, though, and to a large-but-unquantifiable impact, causing share prices to soar. Big Ben's hope (I assume) is that if the market is booming, the velocity of money involved in a booming market will trickle down into the growth of companies, which by extension will in theory spur hiring.

It has done neither...at least not so much. But it has put more money into chasing shares of stock, which has had the direct effect of inflating share prices rather dramatically, if you make a few important assumptions.

This is good for our net worth if we own shares of stock. How much the market is being artificially inflated due to QE is hard to calculate. But assuming the market is a leading indicator of economic growth and grows in direct proportion to the economy—and economic growth has been at best anemic since March 2009 (the last major bottom in the market), one has to assume "something" is driving stock prices higher and higher, other than the economy.

Regardless of whether it is the Fed (my assumption) or not, we need to take advantage of this anomaly and make wise trading decisions. But—and this is very important—the Fed will not always be there to keep equity inflation running at the pace it is running now. Keep in mind:

  • The economy has limped along at or below 2% to 3% (or worse) since the March low in 2009.
  • Real job growth has actually declined, if you consider the total number of people employed, during that same time period.
  • The DJIA is up more than 120% since the March 2009 low. From a SMI perspective, that means share-price inflation is running high.

Even if you assume a modest economic growth of 10% over the last four years (which it hasn't), that means the market is still inflated by well over 110% in terms of economic growth.

I realize that the market is not completely tied to economic growth in the US or the world, for that matter. Other factors come into play when it comes to the rate of growth of share prices.

But I think it more than a bit naive to believe that none of the BB (Bernanke Bounce) of QE has had anything to do with the juicing of the stock market. A day of reckoning is coming and we all need to not be surprised by it.

It is important to stay in the market right now. Even when Big Ben begins to attempt an orderly unwind of his QE activities, and the market begins to contract (drop) in response to a lack of a Fed-induced juicing of the market, you should stay in, but utilize inverse ETFs to make money on the downside. And I suspect a decent downside is coming, but only after the secession of QE.

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