The world remains transfixed in the belief that the Federal Reserve can 'prime' the economic pump one more time via monetizing trillion-dollar deficits ad nauseum, inflate its balance sheet to unprecedented levels, and still successfully exit from this largesse leaving behind a 'better' place for mankind. Judging by crescendo of cognitive dysfunction, the nominal price level of US equities can dismiss current weakness since we just have to wait a little longer (and print a little moar) and the old normal growth will rise phoenix-like from the ashes of our post-debt-super-cycle world. The truth is far simpler - US equity markets are not valued on earnings (LTM, current, or forward); they are not priced off discounted dividends; there is no discounting of macro upturns; or great rotations. Since the crisis began, there is only one thing that matters, as Gluskin Sheff's David Rosenberg notes from this stunning chart, "the NYSE Market Cap, this cycle, actually went up dollar for dollar with the expansion of the Fed's pregnant balance sheet."
Via David Rosenberg,
[Re: the Talking Heads on CNBC] on what impact the Fed's repeated interventions have exerted on the markets, both directly and indirectly. Well, we have done the work in house and the answers are that the 10-year note yield would be hovering close to 3%, the generic high-coupon close to 7%, and the S&P 500 closer to 1,200.
In fact, it could be argued, as the chart below reveals, that the NYSE Market Cap, this cycle, actually went up dollar for dollar with the expansion of the Fed's pregnant balance sheet.
The Potemkin Rally
Source: Gluskin Sheff