Nice mention in Alan Abelson’s Barron’s column this week:

“OUR UNEASE ABOUT THE STOCK MARKET and, to a lesser extent, the economy, also springs from the fact that the Fed has been the prime agent of stimulus for both. Our misgivings, let us make clear, do not imply that Bernanke & Co. should have stood mutely by when the financial system and the economy seemed headed for perdition. In our view, they unarguably did the right thing in shelling out hundreds of billions to keep both from going under.

But we also believe they were excessively eager when the crisis ebbed to keep share prices rising via QE2, if only to buoy consumer sentiment (which strikes us as akin to buying approval). In any case, it’s difficult to underestimate the impact of such stimulus or accurately gauge what might happen when it vaporizes, as it likely will as early as this year.

Which leads us to an interesting riff by Barry Ritholtz, chief cook and bottle washer at Fusion IQ, entitled, “How Much Has the Fed Distorted the Stock Market?” In search of the answer, Barry sizes up the averages of the rallies for one and two years going back to the 1930s. He found the most intense of the postwar moves came in 1982, when stocks shot up 58.3% in the first year — until, that is, the scorching bull run of 2009, which posted a rousing 68.6% gain.

Over two years, the winner had been the bull market that started in late 1974, following the end of a devastating bear market, and climbed 65.7%, only to be left in the dust by the current astonishing advance that racked up a 90.1% gain in just 22 months.

The critical question is how much of this fabulous performance is attributable to the Fed? While it obviously can’t be determined to the penny, Barry reckons that even if only half the market’s superior showing compared with the best of previous postwar rallies can be credited to the Fed, it means that the U. S. central bank created out of thin air “several trillion dollars in market cap.”

He refuses even to guess “the end game of this or the unintended consequences.” We’re brave enough to hazard that the latter won’t be all good.

Fun stuff . . .

Street Crime
Up and Down Wall Street | SATURDAY
Barron’s JANUARY 22, 2011

Category: Markets, Media

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Barron’s Street Crime”

  1. machinehead says:

    Note that mathematically, it would require a gain of over 131% to recover the near 57% drop from the S&P’s 2007 record high to its 2009 bear market low.

    When you’re using a rubber ruler like our brightly-colored, sloppily-printed Federal Reserve Notes, this is no big deal. As the late Saddam Hussein used to say, ‘Anything is possible now, my brothers!’

    Chairman Bensane declined comment.

  2. super_trooper says:

    I suspect Alan Abelson is a reader of your blog. Maybe he’ll keep pick up ideas from online blogs rather than doing some investigative journalisms on his own.

  3. Darkness says:

    Let’s do multiple choice:
    a) It’s different this time
    b) It’s hard to see a bubble when you are in it

  4. this: “…chief cook and bottle washer…”, can, only, be the most affectionate of appelations..

    Abelson, to be iterative, remains the only Quantity, at Barron’s, deserving a AA-rating..

    past that, this: “…the U. S. central bank created out of thin air “several trillion dollars in market cap.”…”, has, certainly, served to quell the Herd (401(k), and the like, “di-”-vestors..)

    now, appraising larger #’s, on their computer-generated monthly Statements, many have gone back to their cud-chewing–from their, previous, discontented Mooing..


  5. rivereddy says:

    Seeking Delta wrote an interesting article along the same lines here: (http://seekingdelta.wordpress.com/2010/09/28/what-qe1-tells-us-about-qe2/). If you use his regression equation for change in the S&P v. change in Fed balance sheet, you get an 61.5% increase in the S&P from a 232% increase in the Fed’s balance sheet. So the conclusion is the Fed is responsible for about 2/3 of the rise in the S&P.

    The questions I have are: how long can the Fed keep this up without some damaging consequences for either investors or the economy?
    and why doesn’t The Bernanke use more credible language to explain his reasons for QE2?

    Yes, I know that the Fed can erode my life savings’ purchasing power for longer than I can stay solvent.

  6. call me ahab says:


    I think your post that Abelson refers to was pretty good. However- you make a comment- can’t remember how it’s phrased- but my recollection is you said the Fed can keep the pedal to the metal indefinitely on stimulus-

    c’mon man . . .indefinitely?

    no market discipline being brought upon the Fed . . .ever?

    Dow ∞ on the horizon?

    wow . . .the Fed rules!

  7. Sunny129 says:

    “..Barry reckons that even if only half the market’s superior showing compared with the best of previous postwar rallies can be credited to the Fed, it means that the U. S. central bank created out of thin air “several trillion dollars in market cap.”

    The moment M to M accounting was suspended since March of 2009, the Zomie Banks announced fake earnings and pocketing bonuses!How much of fraudulent accounting blessed by gutless FASB contributed to this rally?

  8. VennData says:

    In the Roundtable, Fred Hickey must have been mis-quoted when dissing Google’s Crome browser and Google’s Chrome OS. They are not the same thing.

    The Chrome browser has done quite well in market penetration.


    The Chrome Operating system has only been released to a select group of alpha testers (Walt Mossberg reviewed an alpha version. Who “buys” alpha versions of software?) and is still in development.

    Very confusing.

  9. Malachi says:

    Are the exit signs flashing yet?

  10. contrabandista13 says:

    Hey Barry:

    If you’re implying that the Fed, via QE, has disproportionately influenced the rally in the equity market, I wholeheartedly agree. There is no question in my mind that it was their intention to do so. Even the most primitive amongst us would have to admit… “Bull market good… Bear market bad…” CNBC….?

    In another of your recent posts you compare total market cap to, I believe it was, and correct me if I’m wrong, GDP….?

    My concern isn’t that the Fed will not have an exit strategy, my concern is that as the total market cap increases, the Fed will have, even with a much more aggressive QE policy, much less impact on market values, to the point, where QE creates negative feedback as it relates to equities. Most of my “saturation” data indicates that we are close to that data point right now. It’s no longer a question of values, it’s a question of time and all my indications are that equities are very short on time.

    Best regards,


  11. Permabear says:

    I always enjoy Abelson’s columns in Barrons. It’s a breath of fresh air to read what I consider to be a realistic (although admittedly pessimistic) read on the economy and markets in a mainstream financial publication.

    People have very short memories. Everyone loves to make money. The current stock market run is making a lot of folks a lot of money. But didn’t we have the same type of optimism in the years following the tech bust? Wasn’t the housing market supposed to go up forever? All Bernanke is doing, is doing what Greenspan did but on steroids! Not only do we have practically zero interest rates, but he is throwing hundreds of billions of dollars into the economy. I think a rising stock market is one of his goals. He admitted as much as did Greenspan in interviews that came our around the time QE2 was first announced.

    Bernanke is playing a very dangerous game. While I understand the reasons for his actions. (We would already be in Great Depression II without his interventions beginning in 2008.) Bernanke may in the end produce a far more dangerous outcome than he would have if he had just left well enough alone. Which is worse, a 1930s style deflationary depression, or a 1920s style Weimar hyperinflation? Pick your poison. Bernanke has chosen the poison of inflation.

  12. ToNYC says:

    So Helicopter Ben passes out “Walking Around Money” and Alan Abelson does Casey Kasem in recalling the Golden Oldies..as if it were twenty years ago and meant something. Awesomeless.

  13. Machiavelli999 says:

    I could not disagree more with Barry’s assessment. And I feel emboldened by it because this view is the predominant view right now.

    The story goes something like this. The economy is supposed to crash. It HAS to crash. (I bet I can go to any of Barry’s posts over the last year and a half and find that the comment thread is a discussion similar to the one in this thread. Basically, the stock market rally only has a few days left until it crashes. This has been the predominant opinion for the last 1.5 year now)

    And only reason it doesn’t is because Bernanke is printing all this money and it’s going directly into the stock market.

    It’s a nice story it makes absolutely no sense. First of all, if Bernanke was printing all this money and creating inflation, it doesn’t necessarily mean that the stock market would go up. 1970s was the actual era of inflation and it was a terrible time for world stock markets.

    I would like to pose to Barry and to everyone else this question. Instead of asking how much is Bernanke responsible for this rally. Ask yourself how much was he responsible for the crash by being too tight during late 2008.

    “But Mach…how can you say he was too tight. He did so much!!! .”

    He didn’t do anything. He cut interest rates to 0% but setting short term interests is just one tool in the arsenal of a central bank. And it obviously didn’t work. And by didn’t work I mean he let inflation expectations fall to negative levels in late 2008. (Even now after all he has done inflation expectations as measured by the 5 year TIPS spread are only 2.2%) In a fiat currency system, inflation expectations should never go negative unless the central bank lets them.

    Well Bernanke let them go negative and subsequently a crash happened. It was only after he raised inflation expectations again by doing QE1 and then QE2, that interestingly enough the economy began to rebound.

    So, instead of crediting Bernanke with this rally, I blame him for the crash and his policies now are just righting his wrongs.

  14. Referencing back to the original Big Picture article, and from there the citation back to James Stack’s numbers, as with all metrics, raw numbers are to say the least, useful?

    I have just a slight doubt, or possibly some confusion, about how we, as an investment community, can use the week of March 2-9, 2009′s low of 666.79 as the start of a 22-24 month, 90% “Bull Market” gain.

    Given the “one off” nature of the plunge and the March 2009 bottom, I am not arguing with what the original article is postulating: what has QE1 & 2 done for the markets?

    What I am questioning is the particular use of the 2009, 666 low as the data point to compute a Bull Market percentage gain.

    On a weekly SP chart there was one bar that touched that low. There was only one other bar in 2009 that touched as low as 734 (again, referencing a weekly chart).

    In July 2002- March 03, 3 separate bottoms were established before the bull market run took us to the high of 1576…they were 775, 768, and 788.

    So, for arguments sake, using the 2009, 734 number as the low, the (22-24) bull market gain changes from the 90.1% mark to 72%…still high but not nearly as outlandish a number.

    As well, if one decides to use an average of the 3 bottoms put in during the 2002-2003 period…the bull market run from the 777 average bottom to the 2010 high would be a little under 63%. Again, a completely different perspective than 90.1%

    Now, if we should put that 63% number into Mr. Stack’s “Bull Market Gains” chart, things would appear quite different.

    I’m not saying Mr. Stack is wrong in using the 666 V bottom low as the start of the Bull Market run…what I am “repeating” is chart reading is both an art and a science. And flash crash trades can and do get reversed. We should keep that in mind.

  15. Greg0658 says:

    Machi – I think I need to come up with a drum beat of my own .. and place it in SonicFoundry on Repeater
    v.1 = “whats a J6p to do with 0% savings rates > I guess ITs invest in corporate stocks > corps write the law & control the outflow > watch out for TOTAL control of the 21st thru 25th century economies” .. something like that .. oh and I copyright that v.1 @ 1/2 token to me 1/2 token to TBP :-) :-|

  16. call me ahab says:

    “He didn’t do anything. He cut interest rates to 0%”

    wow- as if that’s not doing anything. I guess they should have popped out the QE at first sign of a crack in the markets-

    As an aside- why is the Fed responsible for equity valuations anyway? Sure they have the dual mandate of full employment and price stability-

    but what does price stability even mean? Stable where? Where YOU think it should be? Is a stock market that is going up represent “price stability”?

    especially when its based on Fed actions that foster crashes later?

    “a crash happened. It was only after he raised inflation expectations again by doing QE1 and then QE2, that interestingly enough the economy began to rebound.”

    wow- you sure have a lot of faith in the Fed . . . just pulling right lever appears to make all the difference (in your mind).

    QE2 stated purpose was to lower interest rates (didn’t seem to work- stupid idea anyway since rates were already historically low) . . . but now they are saying . . .well it’s helping the stock market and people will feel wealthier . . .and will spend . . .

    geniuses obviously

    “So, instead of crediting Bernanke with this rally, I blame him for the crash and his policies now are just righting his wrongs.”

    wow- so HIS policies are helping equity valuations go where they SHOULD be . . .right?

    make me laugh

  17. ZackAttack says:

    He got his market highs, at the unknowable cost of making manifest a number of pre-existing sociocultural rifts.

  18. Transor Z says:

    When I first became a reader of this blog a few years ago, there was a lot more trader chatter. All of a sudden everybody started talking about “The Pump,” a mysterious phenomenon that seemed to happen (or were folks just imagining it) near the close of any (and I literally mean any) day that threatened to end in the red. “The Pump” and the question of its existence became a subject of dispute and bitterness here and a prime subject for conspiracy theories at places like Zero Hedge. Was it really just “short covering” by major players? Was it just the normal ebb-and-flow of trading that people needed to just stop whining and do their homework about?

    The timing of the appearance of “The Pump” is well documented here and in other places for posterity.

  19. Greg0658 says:

    thanks for the reminder – v.2 needs to include the pump & pop for ultimate control

    v.2 “0% savings rates > invest spare ITs in corporate stocks > Pop shakes off parasites > private ownership = labor balances to capitals wishes > governmentism vs corporatism > corporatism”

    the ocean is all business > fish to humans
    .. smallfry pick your side (or hide in the coral from the squid) & best wishes all

  20. ToNYC says:

    “He didn’t do anything. He cut interest rates to 0%”

    The Bernanke created fake digital currency immediately to the left of the decimal point. The consequences only involved depriving the collected savings of real savers of their life’s effort the opportunity to participate in the Capital raising experience. The immediate result was an effective 90% tax on what should by all democratic rights to interest pari passu with the best Capital that the bank regularly supplies. A coup de capital rather than d’etat in our face is not f’n nothing.