DJIA at 15,000?

After the exceptional period of quantitative easing, central banks are trying to return to normal conditions. The stupendous amounts of cash they created to buy up Treasury and corporate bonds were a boon for stock markets that seem to have been the only beneficiaries of that generosity, with no noticeable trickling. Now that the rivers of cash have slowed down (Japan), stopped (EU) or reversed (US), those who profited the most will be the primary losers.

The massive demand for bonds by central banks pushed up prices and automatically brought down interest rates. And, simultaneously, central banks reduced their discount rates to almost zero, and below in Japan. These measures of cheap debt and free credit were a huge encouragement for all kinds of borrowing. Some of the new debts were for consumption by governments and households, but a lot, if not most, was invested in stocks and bonds. Those investors are now facing the double squeeze of falling share prices and rising interest rates.

The US Federal Reserve was the first to employ quantitative easing after the 2008 recession. It was the first to end it, and is the first to start reversing it, by selling bonds or by letting them reach maturity and having them paid back. In both cases the cash returns to the void it came from. This is reversing the cash flow of previous years into a cash drain. Less circulating cash and more expensive borrowing are having a predictable effect on stock markets, and the return to “normal” could mean a Dow Jones Industrial Average index dropping below 15,000.