There is no mystery. It's the Fed. And frankly, it's disingenuous for Schiller to pretend that he doesn't know why.
Quantitative easing is working exactly as the Fed had hoped. It's causing bond prices to be sky high, mortgage interest rates to be as low as they've ever been, the stock market to be sky high, house prices to be sky high, etc.
Now, what happens when the Fed takes away its QE? No one knows for sure, but many speculate that all these bubbles will burst, because they are all artificially generated.
Personally, I am going to be taking all my money out of the stock market some time next year, and wait for the crash in October 2015. Crashes usually happen around that time, and then hopefully the economy survives this second recession. Until then, the sky's the limit in terms of where Wall Street is going to push the stock market.
And with central banks holding so much equities, who will bail out the central banks if the stock market crashes?
We’re getting closer to an international sovereign debt central bank crisis now that we’ve created all this sovereign debt and printed all this money. We’re getting closer to an international sovereign debt central bank crisis where we actually lose confidence in the central banks. Who’s going to bail them out? The answer is the IMF. The IMF will print SDRs and hand them out. Countries will swap them among themselves and re-liquefy the world. It’ll be highly inflationary.
And after people lose confidence in the IMF? Who bails them out? The only thing standing behind the IMF, is gold. Although the IMF is the third largest holder of gold in the world, with close to 3000 tons. After US and Germany.
Yeah it's a mystery, the big banks made off like bandits in 08, and no one went to jail for any of it. The Feds printing money to keep up with China, and maybe the EU. Corporations have more cash than they can use, which is why we see these absurd acquisitions. The valuations are meaningless.
Money is no longer a means of transmitting value: all people care about now is making bigger numbers regardless of whether or not value is created. In the end it's self-defeating and may lead to a breakdown of the economy over the next 10-20 years.
No mention of demographics, the inflation rate, the T-bill risk-free rate of return, or of the GDP growth rate (I'm not saying any or all of these ARE correlated, they're just things I think it would be obvious to analyze before just declaring it a mystery)?
Well, I guess he does mention some of them are correlated with the stock prices, but then ends with "nobody knows anything".
Funds aren't allowed to invest in anything they want, but typically have investment mandates.
Somewhere in the region of $3 trillion (my estimate) is in pension funds/endowments in the US that have a 7-8% nominal return target for their managers.
Bonds price off the Fed funds rate, with longer dated bonds being based on predictions of where these rates will go plus an inflation component.
If the 10 year US bond is giving you 2.4% yield to maturity and you are, say, head of CalPERS who runs $268bn and needs to hit 7.75% nominal return, what will you invest in to keep your job?
Perhaps rising wealth inequality leads to a larger proportion of money being stashed away in investments trying to make more money for the wealthy, and ultimately results in pathetic investment yields which create a self-balancing situation where people who actually work for their money are actually better off..
It seems like you just made an argument where expanding income inequality is in the end better for those in the "have not" column, because the investments of the rich aren't doing amazingly well, so there take that.
When the rich are getting measurably richer, measurably faster, that theory kind of falls on its ass.
I think it applies more to the middle class than the rich. The very rich still have easy access to lucrative investments, but the upper middle class (and perhaps the slightly to moderately rich) don't. The result is a shift in incentives away from stock trading and toward entrepreneurship.
Of course I'm not saying expanding income inequality is better for the have nots. I'm just saying this may lead to some self-correction of relative earnings from labour vs. capital as wealth becomes more concentrated, although overall things are still worse for the working chump.
While reading the article I was thinking what changed so drastically in the last hundred years.
Is it possible that pension funds, social welfare funds and insurance companies are behind it all?
They have loads of money and they kept getting it throughout the recession. They do not like or are not allowed to invest into risky ventures. Therefore they just keep propping up what is deemed "safe".
I'd say this is the standard 'financial markets exhibit levy-distributed changes' issue. The random walk will have more deviations in the long tail, so if you expect a normally-distributed martingale, you will be surprised when the market 'goes too high'.
Along with the points already mentioned -- a lot of baby-boomers have been saving for retirement for a long time. Stocks/mutual funds are a major way that people save/invest.
Quantitative easing is working exactly as the Fed had hoped. It's causing bond prices to be sky high, mortgage interest rates to be as low as they've ever been, the stock market to be sky high, house prices to be sky high, etc.
Now, what happens when the Fed takes away its QE? No one knows for sure, but many speculate that all these bubbles will burst, because they are all artificially generated.
Personally, I am going to be taking all my money out of the stock market some time next year, and wait for the crash in October 2015. Crashes usually happen around that time, and then hopefully the economy survives this second recession. Until then, the sky's the limit in terms of where Wall Street is going to push the stock market.