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My brokers calculation showed it as Fully valued 5 weeks ago.

The misattribution of cause and effect in 2009 created the Grand Superstition of our time – the belief that Federal Reserve policy was responsible for ending the financial crisis and sending the stock market higher. By 2010, this narrative was so fully accepted that the Fed’s announcement of further “quantitative easing” was met by equally great enthusiasm by investors.

Complicating matters, the European Central Bank forestalled a currency crisis in Europe through massive purchases of debt from credit-strained member countries. While this action was interpreted as quantitative easing, it actually functioned as a funding operation to weaker countries that was much more akin to a fiscal subsidy from stronger countries like Germany. Still, the fact that it was executed by the central bank and eased the Euro crisis helped to contribute to a perception that central bank purchases of government securities – in and of themselves – are sufficient to support the stock markets indefinitely. Worse, perception creates its own reality in the financial markets, so provided enough investors believe something to be true, the outcome is the same as if it really were, but only for a while.

Don’t misunderstand. Quantitative easing has undoubtedly been the primary driver of stock prices since 2010. But the benefit of having a human intelligence is the ability to evaluate the extent to which there is any mechanistic link between the cause and the effect. If there is not, investors may be resting their confidence on little more than perception and superstition. This is exactly what historical data indicates.

In the case of quantitative easing, there is one variable that is tightly, logically, and consistently linked to Fed actions. We have nearly a century of evidence that the amount of base money created by the Fed (per dollar of GDP) is strikingly related to the level of short-term interest rates. The chart below illustrates this relationship in data since 1929. Yet the same effect is not observed with anything close to the same strength for long-term bond yields. Worse, looking over the full course of history, there is virtually no relationship between the monetary base (level, change, ratio to GDP) and stock returns (regardless of whether one examines concurrent returns, subsequent returns, yields, or estimated prospective market returns).
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