For charts go to discussion.fool.com - How debt drove market multiples

To see how massive amounts of debt have propelled stock market values far above real GDP growth, I charted data taken from the Federal Reserve.

I chose 1980 as the index year because that was the beginning of a multi-decade drop in interest rates (rise in bond values) and was also the beginning of the great bull market in stocks.

I chose to plot this on a linear chart (instead of a logarithmic scale) to show the exponential growth in stock prices relative to GDP growth. I showed nominal GDP as well as real (inflation-adjusted) GDP to show that even the nominal GDP which shows the impact of inflation is far below the growth rate of debt and far below the growth rate of the corporate equity market. (FRED can’t show more than 10 years of SP500 due to a restrictive deal with S&P so I used a all-market series from the Fed.)

The massive amount of fiat money conjured out of thin air by the Fed goosed the asset markets starting in 2008.

Fed Chair Warsh has said that the Fed should stop meddling in the markets. Among other things, this probably means Quantitative Tightening (QT) or at least no more QE. (Other than the fed funds rate which is pumped into banks every day on their reserves held at the fed, currently 3.5%-3.75%.)

The 10 year Treasury yield, which is most important for business, has reversed the trend since 1980.

The era of cheap money is over. The stock market is inflated by over $1.5 Trillion in margin (almost 5% of GDP).

Can the stock market multiples continue to inflate exponentially without the vast ocean of fiat money – so much faster than the growth of real GDP?

Wendy