coolioyo
Education

Why Does the Market Always Go Up?

TVC:DJI   Dow Jones Industrial Average Index
These are just my thoughts and hopefully they add to the discussion of what is going on with inflation .

Some people look at the markets and think it must be the Fed that is printing all this money, why else won't the market go down? The Fed does not print money, they can only help facilitate loans by lowering interest rates or through quantitative easing which provides liquidity to banks. What does create money is loan creation. When an individual or business takes out a loan that is new money that is created that wasn't there before. The other way money is created is when government borrows money from the treasury to carry out projects, that is also a loan. These two ways money is created can be generally classified as monetary and fiscal policy (yes, I know I oversimplified it). The loans in effect increase the money supply, once that loan is paid back that money is gone and that money supply shrinks again. However, the loans that are borrowed are more than just the principal value but also include interest that adds up over time. Keep this in mind for later.

So, over time as businesses grow and more people come into the workforce or markets and government borrows more, money is taken out and the money supply grows. This happens over time in the business cycle. This by itself causes inflation and some of this inflation is offset by products and services created by businesses. This by itself can explain some of the rise in the stock market but why would the stock market continue to rise even when so many businesses are or will be getting bankrupt and many are unemployed. The other main driver of the stock market or inflation is interest on loans or debt. Over time, this interest continues to grow, and any self-reputable business will adjust for interests costs when selling their products or services. The cost in the price of products and services needs to reflect this interest rate over time. This causes inflation ; as bossiness borrow money with interest they need to offset that interest by increasing prices of goods and services. This will be reflected in higher stock prices because the overall price of goods and services will be up.

So, in general the stock market rises because of a) business growth that is based off of loan growth or debt and b) debt that is compounded by interest causing prices of goods and services to increase that will be reflected in the stock market. The business cycle follows a not so predictable pattern that will cause some ebbs and flows in the stock market but interest on loans are always present so inflation will always be present and stocks will always go up over time. Therefore higher interest rates over time will cause inflation and we are already seeing that in the stock market. Eventually this will be more noticeable in the CPI . The interest rate right now is very low so this will slow down the rate of inflation (disinflation) but inflation will not be stopped because it is tied so close to interest on loans which are still present. Hopefully that answers the question why Stock Market always goes up and will always go up even if the current economic background doesn't reflect that. Here is an article talking about some of the same stuff I mentioned:
https://wealthyaccountant.com/2017/09/27...

Feel free to add to the discussion. If this sounds too simple, it's because I meant it to be.

Comments

As a noob, I totally appreciate this! Sad as it sounds, I learned a ton from this single post.
+1 Reply
IMO the few stocks ie FAANG stocks that are going up are pulling their indecies with them. Institutional investors are out of equities and have been for a while, leaving the bag to be held by retail investors who have no clue and deposit their $1200 into their Robinhood account.

Plus every dip the markets take the Fed makes an announcement that they will back ALL markets with their "tool belt". Similar to the casino telling all the gamblers, "spend everything you got, we've got your back."

Whats your thought on fractional reserve lending, its done at every level of the banking system regardless of demand from consumers.

Inflation is a monetary phenomenon it is the increase in money supply combined with velocity of money, more dollars chasing fewer goods and services.
Reply
coolioyo AMERICANHANDYMAN
@AMERICANHANDYMAN, Stocks go up based on the business cycle but the amplitude or how high they go up are determined by inflation. We are at the tail end of the bull market so stocks will still go up a bit more in my opinion. There will be a crash, but ultimately in 20-30 years from now the market will be alot higher. The trick is to time it correctly, that is where EW is very helpful.

The FED's announcements are nothing but encouragement and cheerleading, it will only go so far.

Fractional reserve lending is another way the system causes high amounts of inflation and multiplies the amount of money in the system. When banks lend more than they currently have, they are taking a chance that the business cycle will continue to grow so that loans payments can be made and more money is coming back to the bank than leaves it. When the business cycle ends and loans default and businesses go bankrupt, banks lose that loan payment they have been receiving and in addition they lose money from depositors who need to pay their bills. Banks are actually reducing the amount of loans or are more careful on who the lend it to nowadays because they know the system is overextended.

You are correct inflation is the increase in money supply combined with velocity of money and that is why CPI still remains relatively stable because people are overall poor, but asset prices are going up because the money supply is increasing and money is being concentrated in assets at the moment by relatively few rich investors.

Thanks for your comment.
+1 Reply
Post that chart with DJI expressed in gold as opposed to usd. Different story.
Reply
coolioyo JakubKonieczny
@JakubKonieczny, lol, you go the right idea there was a reason why I used USD. Here is a chart using gold https://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-historical-chart
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@coolioyo, NDX in gold terms is even crazier
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