I am not seeing the connection.
Apple trades below 200 currently. If tomorrow, Apple were to trade at 400, would $3 trillion in money be removed from the economy? I don’t think so.
The Fed added a ton of money to the economy in 2009-10. Over the next decade, P/E ratios went up but not the consumer price index. That suggests most of that money went into buying stocks rather than the purchasing of goods/services.
If one sells Microsoft to buy Apple then no money is removed. If one forgoes buying a Model S plaid to buy Apple stock then yes, money is removed from the economy.
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That is not what I illustrated. If Apple were to increase in value by $3 trillion dollars, that does not mean that there is $3 trillion less available to buy a Tesla - any more than an increase in my home value means that $100,000 has been removed from the economy and added to my home equity.
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But the seller of the Apple stock receives the money and can potentially buy a Model S plaid, so the money hasn’t actually been removed from the economy, right?
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Let’s say instead of spending $100k to buy a model S, I buy Apple stock from you. That means that I hand you $100k, and you hand me the shares. But after that transaction, you have $100k in your pocket to buy that same model S that I didn’t buy.
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Unless he is married and lives in a state that is 50/50 than his wife has $50,000 and he has $50,000.
Andy
Arggh, you and others are right. Bad choice of words. What I am trying to say is that if after a large amount of money is added to the economy P/E ratios go up but not inflation, that suggests the windfall was used to buy stocks rather than consumer goods/services.
I agree. But it does say something about the demand for real estate. Changes in price provides information in how money is being spent. The question being asked is given the low inflation in the pre-pandemic years, what happened to all that money that was added to the economy in 2009? I’m suggesting that the rising P/E ratios during this period suggests it mostly went into the stock market.
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Not necessarily. Supply and Demand are both a factor. Housing starts dropped off a cliff during Covid so the sever lack of supply was a significant factor in the price increases - especially in areas that were not experiencing much growth prior to Covid coupled with the changing workplace dynamics.
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Sure, price changes are not conclusive of changes in demand. But they are pretty suggestive.
Do you believe the lack of substantial inflation from 2010-2020 was due to increased US productivity? I think it is more likely that the apparent disconnect between quantitative easing and inflation (since the Great Recession) is because much of the added money went into the stock market.
Back in 2021:
Stock prices inflated rather than that of goods/services.
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Supply was the reason for both cuts in Demand and massive price increases. The price of wood from Canada went up 2x-4x, so the basic cost of framing a house went sky high–driving up prices. Other items also went up–appliances, flooring, and so on. So the “typical” house price went up 20%-30% or more as a result.
The reason the price went up is because Trump raised the Tariffs on Canadian softwood lumber and Biden increased them when he came into office. They have been fighting over this for years.
Andy
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To cite various groups: When you want less of something, tax it.
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Ayup. As noted here before, productive work is taxed much more heavily than financial speculation. So, what do we get? Less work, and more speculation.
Steve
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Right Jerry but they are doing it trying to save the American lumber industry, or really trying to placate the lumber industry. I think it is a lost cause but they just keep doing it. Really doesn’t make sense though since when you cut a tree down it takes 20 to 40 years depending on the species, to get big enough for the lumber mills.
Andy
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Factoids like these make interesting reading, but don’t really tell you much in isolation.
If we want to examine “exuberant demand” or perhaps “hot money chasing stocks” then we can look at historic P/E ratios for the market, or in this case, the S&P which is as good an approximation as you are likely to find.
And… P/E expands and contracts over time, but the really dramatic changes happened in the 1970’s and the market has, to coin a phrase, “reached a permanently high plateau.”
https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
(You can note the big spike at 2008, when earnings briefly collapsed, otherwise, also note 2009-2013, when the Fed was supposedly “flooding” the country with money how the ratio returns to somewhat below recent normal tell me that no, the money wasn’t going into “stocks”.
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“This interactive chart shows the trailing twelve month S&P 500 PE ratio or price-to-earnings ratio back to 1926.”
Since the S&P 500 wasn’t created until 1957, that’s a bit of a stretch. What are they charting?
DB2
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It is in how the military industrial complex is forming wealth and power. You do not want to give it away.
For us smaller fry that is not many entries.
This is an example of being so concerned about the forest that you miss the tree. The 90 year view doesn’t matter on this issue as the inflation rate over the past 15 years is not impacted by economic conditions in 1980.
It has long been known in economics that there is an inverse relationship between P/E ratios and the Consumer Price Index (CPI). When P/E ratios are high (as when money flows into the stock market) inflation is typically low, and vice versa. One can come up with any number of causal explanations for this but one possibility is that the demand for stocks competes with the demand for goods/services. If one goes up the other goes down.
There was substantial quantitative easing during 2009-2020 that raised the money supply. During this period inflation was low but P/E ratios rose. One simple explanation is that the added money was used to buy stocks instead of goods and services.
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