Why Does The Market Keep Rising?

By Gordon T. Long

This gigantic flood of extremely inexpensive high-powered money does have a major impact, not in the real economy, but in the liquid investment markets.

Free money sets a very low hurdle for a short-term investment and as long as the transaction has decent liquidity, why not do the trade. As a result, almost every equity, commodity, and credit market is moving higher.

High beta currencies are moving higher as well, as risk is clearly on the front foot. This positive mood began at the start of October, a bit more than a week after Bernanke announced the start of ‘Operation Twist,’ a subtle way to improve the profits of the banks and increase the risk of the Fed without expanding its balance sheet.

Global equity markets began to climb.

· Bernanke then announced an expansion and cheapening of the US swap lines with Europe, which currently have $103 billion outstanding, adding massively to Europe and Japan’s liquidity.

· Mario Draghi’s move into the ECB Presidency on November 1 was the next harbinger of a new wave of liquidity, as he dropped the refinancing rate a few days later.

· Then Draghi announced the LTRO on December 8, expanding the ECB balance sheet by over 4% of the GDP in one day later in the month.

· By the end of December things were clearly moving up in all the traded markets.

· Bernanke put the cherry on the top of the sundae not once, but several times in the last few weeks. (more)