The Fed Balance Sheet & The Future of Asset Prices

We spend a considerable amount of time on our silly little podcast agonizing over levels in the S&P 500. As we hover below 4,000, is the stock market overvalued or undervalued? Did the market bottom at 3,600 in October? Will this recession bring about the same relative decline as the Tech Bubble of 2001? 

But it bears reminding that levels are an illusion. Pop open a chart of the equity market over the last 20 years and you can't help but think the run-up is nonsensical. How could we not be on the precipice of an epic correction? A world gone irrational! But that chart is little more than an artifact of Central Bank largesse. Over time the Federal Reserve has accumulated the liabilities of the American Financial system. The practical consequence? The inflation of asset prices to previously unimaginable heights. 

We are left to wonder then, what will happen to the stock market over the next decade? Far be it from me to actually say. But as Michael Howell pointed out this week, we are witnessing in real time the de facto nationalization of American Banks. The unraveling of regional banking sets in motion the next play in the same endgame. Resolved to thwart any systemic crisis, the Fed and the Treasury will absorb for all time the liabilities of the American banking sector. And they will, as ever, monetize the ever increasing Federal debt. That means only one direction for the Federal Balance Sheet. Up again. And with it, asset prices...again.