It seems likely that significant capital inflows are helping prop up asset valuations in the U.S.
Nobody really believes the official narrative that the “recovery” is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve’s free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared.
This view has the strong merit of relying on the basics of supply and demand: if the supply of nearly free money expands while the quantity of stocks, bonds and real estate shrink, remain stable or expand at lower rates than nearly free money, the flood of liquidity will push the price of assets higher.
The Fed’s suppression of interest rates has generated another powerful incentive to buy assets that generate some sort of yield: with safe Treasuries yielding so little, “risk-on” assets like stocks and junk bonds have soared due to strong demand.
But the notion that the Fed is the single cause of U.S. markets’ strength doesn’t quite explain why the Fed’s massive reduction in QE from $85 billion/month to $25 billion/month hasn’t sent markets dependent on the Federal Reserve’s free money for financiers into a tailspin.
For an example of what the Fed’s tapering should do if it is indeed the dominant causative factor, we need only look at what happened to peripheral capital markets in 2013 when the Fed started tapering: they tanked as speculative inflows dried up.
This leads us to wonder if capital inflows into the U.S. aren’t a largely overlooked driver of rising U.S. markets. Capital inflows are certainly a factor in the buoyancy of U.S. real estate, as various estimates peg recent Chinese purchases of U.S. housing at $22 billion–and this is only a snapshot of a much larger flow of capital flowing into the U.S. real estate market from Russia, the mideast and Asia.
