How Money Printing Has Suppressed Volatility
Stock Prices reflect the flow of money not the actual value of the business
The way stocks are priced today is very different from the past. Two big changes have made this happen: central banks printing money and the rise of automatic investing through index funds.
What Happens When Central Banks Print Money
When the Federal Reserve “prints money” (mostly digitally these days), several things happen:
Cash floods the system: More people have cash sitting around that needs to go somewhere. Much of it ends up in stocks.
Volatility drops: All this extra money flowing into stocks makes the market calmer.
Why Some Stocks Keep Going Up (Even When They Shouldn’t)
Everything moves together: Even when a company reports bad earnings, printed money keeps flowing into index funds and because index funds buy baskets of stocks all at once, good companies and bad companies get bought together.
The Fed safety net: Central banks have shown they’ll step in and print money to rescue the market when things get scary. This makes people feel safer holding stocks, which attracts even more money, making markets even calmer. It’s a cycle that feeds itself.
Why Traditional Analysis Doesn’t Work Like It Used To
Earnings don’t matter as much: A company can report disappointing profits but its stock still goes up if enough index fund money is flowing in that day. Meanwhile, a company improving its business might see its stock go nowhere if it’s not in the major indexes.
Stocks stay expensive: Traditional measures like price-to-earnings ratios have gotten much higher than historical averages and just stay there. The market can look “overpriced” forever as long as the money keeps flowing.
Price discovery breaks down: With fewer people actually analyzing companies and more money going into index funds, the market gets worse at figuring out what stocks are truly worth. Prices reflect the flow of money more than the actual value of the businesses.
We Believe There Are Still Risks
Money printing has broken the old rules of how stocks get priced. Instead of prices reflecting company performance, they reflect money flows and central bank support. Markets look stable and calm, but this artificial calm might be hiding problems that could explode later.
Calm before the storm: Just because we don’t see crashes doesn’t mean risk has gone away. It might be building up quietly. If the flow of money ever reverses (like when baby boomers retire and start selling), things could unravel quickly.