Analysis: 93% of Stock Market Gains since 2008 caused by Federal Reserve

Scouring hundreds of different factors, Barnier ultimately whittled it down to just four factors: GDP data five years into the future, household and nonprofit liabilities, open market paper, and the Fed’s assets. At different stretches of time, just one of those was the single biggest driver of the market and was confirmed with regression analyses.

He isolated each factor in a separate chart, calling them “eras” for the stock market.

1. From after World War II until the mid-1970s, future GDP outlook explained 90% of the stock market’s move, according to statistical analysis by Barnier.
2. GDP growth lost its sway on the market in the early 1970s with the rise of credit cards and consumer debt. Household liabilities grew with plastic first, followed by home mortgages, until the real estate crash of the early 1990s. Barnier’s analysis shows debt explained 95% of the entire market’s move during this time. 
3. The period between the mid- to late-1990s until 2000 was, of course, marked by the tech bubble. While stocks took much of the headline, that time also saw heightened activity in the commercial paper market. Startups and young companies sought cash beyond their stratospheric share values to fund their operations. Barnier’s regression analysis shows commercial paper increases could explain as much as 97% of the tech bubble. 
4. Shortly after the tech bubble burst, a housing bubble began, once more in the form of mortgages and other debt. That drove 94% of the market’s move for the first several years of the current century. 
5. As the financial crisis reached a fevered pitch in 2008, the Federal Reserve took to flooding the financial market with dollars by buying up bonds. Simultaneously, interest rates fell dramatically, as bond yields move in the opposite direction of bond prices. Barnier sees the Fed as responsible for over 93% of the market from the start of QE until today. During the first half of 2013, the Fed caused the entire market’s growth, he said.

Since the Fed stopped buying bonds in late 2014, the S&P 500 has been batted around in a 16% range and is more or less where it was when the QE came to a close. Investors need to anticipate the next driver, said Barnier.

The frightening aspect of this is that the Federal Reserve has such tremendous power to influence the market, even though it has no relation to the actual health of the economy. So far the United States has been exceedingly fortunate that no other major currency has developed to replace the dollar, though recent selloffs of dollars by China and some Middle Eastern countries could signal big trouble if other countries follow suit.

The danger to America could be far greater due to currency manipulation leading to a huge economic crisis than to a military confrontation. There is every justification to believe that we are riding another huge economic bubble and that a crash is in the future that will be far more damaging than the one we faced in 2008.

Source: finance.yahoo.com