It’s Not Coronavirus

Mass market financial news outlets are attributing the current US stock market selloff to fears about spreading coronavirus. These are many of the same outlets that have also been reciting upbeat stats about the effects of previous plague scares on stock prices. Which will it be folks?

Fortunately other outlets don’t share that Wall Street bias. Wolf Street for example ran a post yesterday pointing out that the Federal Reserve had just put its balance sheet explosion on pause: Fed’s Repos Drop to Oct Level, T-Bills Surge, But MBS Fall, and Total Assets Decline Further

The corporate news media doesn’t want to get into the nitty gritty of why a constant torrent of money creation is necessary to keep a stock market bubble inflated, because to do so would be an admission that a torrent of money creation has inflated a bubble in the first place. It might undermine the narrative that stock prices are so high because of all the wonderful innovation of its corporate masters. A few starry eyed investors might start to question their premises and sell their overpriced stocks, compromising the value of the stock options that have been making the rich so much richer.

Some have been trying to portray the US stock market overvaluation question as if there were a legitimate controversy. Just a matter of opinion … choose whichever side you fancy. MarketWatch just today ran one such piece: These 5 charts show the debate over whether the stock market set up for another dot-com crash. Notice how the only of the valuation measures cited that do not show egregious overvaluation are those that merely compare overvalued stocks with overvalued bonds. Of course you’d look thinner standing next to someone who weighs six hundred pounds, but that wouldn’t mean you’re not fat.

The only reason stock prices need fall is that they’re too high to begin with. It happened after the dotcom bubble and it can happen now. And no coronavirus needed either … somehow stocks managed to plunge 20% in 2018 without it, and it can happen again. All that’s needed is for the bubble to implode is for the Federal Reserve to stop pumping in the helium.

2 thoughts on “It’s Not Coronavirus

  1. jk says:

    re “the current selloff”- by my calculation with the spx we’re down about 2% from the high. interesting that this can produce so much commentary in the media.
    having been a market participant during 1987 i have to laugh.

  2. Bill Terrell says:

    MarketWatch yesterday ran two articles by Mark Hulbert supporting these conclusions:

    The main reason for the stock market’s decline is NOT the coronavirus

    Will the stock market be able to support you in your retirement?

    “… What about low interest rates?

    One rebuttal to these sobering projections is that the stock market deserves to appreciate at a faster rate when interest rates are as low as they are today. But the historical data do not support this rebuttal.

    Consider what I found when I added the 10-year Treasury yield as an input to each of the econometric models I constructed for the above eight indicators. In no event did this addition increase the model’s forecasting power, at least at standard levels of statistical significance. In any case, furthermore, my PC’s statistical package found that higher Treasury yields were associated with higher subsequent stock market returns, not lower…”

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