This, from macro strategist Julian Bringden in a recent interview should sound very familiar:
“I think we have seen a bit of a sea change, and I think it goes back to this fundamental problem. The U.S. economy is so financialized now that ever allowing a correction in the equity market is in itself almost impossible. The problem is you’ve created the scenario where basically CEOs aren’t paid to produce anything.”
“Suddenly we were funding all of these never to be P&L (profitable) companies. What these CEOs are paid to do is inflate the asset price; inflate the stock price.”
“So the minute the stock price stops rising, for whatever reason, the immediate response is, let me try and cut costs. And the two things you cut are employment and capex.
So the Fed is in the unenviable situation where, having inflated these asset prices, like I said, if you go take S&P p/es (price/earnings ratios) and you put them against the Fed balance sheet you can argue that they’ve taken the p/e from about 12 to 30.”
Here’s a 10-year chart (top panel Fed Balance Sheet, bottom SP500 p/e):