Quantiative Easing fuels stock markets, but why?
There's a premium or discount for various stocks subject to influence by the alternatives available to investors, meaning investments are susceptible to the principle of supply and demand. This is easily seen when industries or business models get hot, and everybody wants a tech company, a social media company, or a solar company in his portfolio.  You'll see bubbles like the dotcom bubble, the RE bubble, etc., as people start to think that the industry and not its performance are all that matters.  The stock price of a desired industry or company is inflated beyond what might otherwise be expected, to accommodate the premium that the investment can demand. So if bonds become uniformly less attractive in terms of returns, and certain institutional investors are largely obliged to continue purchasing them anyway, then flexible investors will need to look elsewhere.  As more people want to buy stocks, the price rises.  Supply and demand is sometimes so elementary it feels nearly counter-intuitive, but it applies here as elsewhere.
"**Japan Has Entered The Next Phase: Unlimited Money Printing**  Investors have been watching Japan for over a decade now, wondering what happens to a country that has a debt-to-GDP ratio of 234%--too big to realistically pay off. We are starting to get the answer. For review, Japan was the first country in the modern central banking era to begin a policy of quantitative easing--an unconventional form of monetary policy that is used when interest rates have already been lowered to the zero bound. Quantitative easing, which involves the purchase of ""printed"" money to buy government bonds, was widely viewed in Japan as a failure, but what most people don't understand about Japan's early QE experiments is that they were very small--less than $20 billion a month. It took Prime Minister Shinzo Abe, and BOJ Governor Haruhiko Kuroda to ramp up asset purchases significantly in what was called ""Abenomics.""     Shinzo Abe, Japan's prime minister. Photographer: Akio Kon/Bloomberg     The results of Abenomics have been mixed, but the stock market is certainly higher and the yen is certainly lower, although it's not clear that either of those two developments have really helped. Japan's stock market is mostly foreign-owned, and the weaker yen didn't materially help the balance of trade. Still, there are a lot of people who said that Japan's endless debt deflation would have been worse without Abenomics, so it has remained firmly in place for five years.  Abenomics rapidly began to cause distortions, as accelerated asset purchases caused the Bank of Japan to hold a huge percentage of outstanding government bonds, at 40% and rising, as well as being the majority holder of index ETFs. Investors who traffic in JGBs have remarked that the market now functions very poorly, since so much of the market is held by the BOJ. It seems that will get worse, not better. Last year the BOJ implemented a policy of yield curve targeting (ostensibly to help the banks), keeping the overnight rate negative but targeting a 10 year rate at zero percent. The BOJ has been buying longer-dated bonds for years, but this was the first time it ever explicitly capped a rate at longer maturities. Some people wondered how committed the BOJ would be to maintain that cap in the event that JGBs were caught up in a global duration selloff, which we experienced in the last two weeks.  As 10-year JGB yields rose above 0.10% last week, the BOJ announced that it was prepared to buy an unlimited amount of bonds to keep yields close to zero percent. As you can imagine, buying an unlimited amount of 10-year JGBs involves printing a theoretically unlimited amount of yen, so the yen weakened significantly on the news.  It still remains about ten percent stronger than it was in 2015. We are getting closer to the endgame for Japan. What happens if yields rise further? What happens if the yen depreciates significantly? How much could it depreciate? Could Japan have a currency crisis? What happens if the BOJ ends up owning the entire bond market? These are the questions that investors are asking, and nobody really knows the answers. We are in uncharted territory. I believe that a currency crisis isn't just possible--it's inevitable. And it probably happens at about the time that the BOJ owns all or nearly all of the JGB market, and has to resort to canceling the debt. This sounds like a neat magic trick to make the debt go away, but the laws of economics are not to be conned. Anything is possible--a currency crash, a bond market crash--anything. This is the very definition of debt monetization that resulted in hyperinflation in places like Weimar Germany and Zimbabwe. Is Japan different? We shall see. We will find out soon, as Japan has taken a major step in that direction.  Jared Dillian is the author of All the Evil of This World, and the editor of the 10th Man newsletter for Mauldin Economics. Subscribe here.  *Forbes articles have 8 tracking cookies and 9 tracking scripts. This comment has none.*(https://www.reddit.com/r/raws/comments/68xk37/about/)" The stock price is not only based on the general market trend and the stock's current profitability and prospects, but is also based on prediction of how the stock's prospects might change in the future. In almost every case, there are professional investors analysing the stock's future prospects and considering whether it's over or under values for its current price. However even professionals can be totally wrong.  If you feel like you have a good grasp on whether the stock will have improving or declining prospects over time, then you might be (if you're right) equipped to make a sensible decision on whether to hold the stock or not. If you don't think you have a good understanding about the stock, then an understanding of the general market direction might at least make stock in general worth holding. Otherwise, you are simply taking a punt. If you know of another stock that has better prospects, then ask yourself why you would hold onto the stock that you think will perform worse.  But also bear in mind that (in my understanding) research has shown that, on average, people who try to pick stocks rarely do better than a random selection, and more stock trades means more brokerage (which thanks to brokerage losses would mean you will end up doing worse than average unless you really do know better than the market). I was doing some thinking about this a while back, and it makes absolute perfect sense for Amazon to buy UPS with issued shares.  First off, Amazon's stock is overpriced in every form of the word, which means using issued stocks to buy things is the best way to abuse the current situation. It gives even more validity to their share price. Some examples... If lets say Amazon issued 1 extra share for every existing share, it would give them 235 billion of purchasing power. If they used this to buy 235 billion worth of utility companies, the stock price cannot really go down below 235 billion in market cap, because they own 235 billion in real, valuable companies. So if a completely worthless company like the South Seas Company issued stock to buy real businesses, they could make validity to their absurd price. If the South Seas Company had a market cap of 500 billion at their high, and issued 1 share per existing share, and bought 250 billion dollars of businesses and assets, they suddenly became a real company and cannot really go under a market cap of 250 billion. Too bad they didn't, and the company went under almost instantly once the scam was found out.   By buying UPS, they gain the company at a discount of the discrepancy of Amazon's price and intrinsic value. But the biggest reason to merge with UPS is for their current customers. So with deliveries, Amazon would have to spend the same amount on their route as UPS. They still have to hire a driver for 8 hours a day, they still have to pay for the same amount of gas, and they stop at more or less the same amount. So your expenses are fixed. Any extra package that Amazon would deliver that they wouldn't before, is almost pure profit. The expenses don't change if the truck is 3/4 full, or full. Which means that all of UPS's business would become almost pure profit. They need to buy UPS or Fedex, making a new service is a huge mistake. It's probably just a bargaining chip in negotiation because of these reasons.  Also a side note, Amazon should also buy a huge railroad. They have a part in every inch of this country, and to buy its own method of transportation to transport boxes, which is more fuel and time efficient than trucks makes sense. They would also be able to design a lighter weight train designed to just carry boxes. Sending one truck to a warehouse is much more costly than just attaching a light weight train car heading to that warehouse anyways.   Just my two cents if I were CEO of Amazon. "I think you underestimate the power politics and favoratism play in teacher ratings and the impact of local school systems.  Until/unless the us moves to a national system then the notion of ""good"" and ""bad"" teachers is entirely up to the officials who oversee the teacher and thus more a matter of politics than any sort of absolute rating.  Indeed I'd suggest a quantiative rating is not only infeasible but impossible." "Your explanation is nearly perfect and not ""hand wavy"" at all. Stock prices reflect the collective wisdom of all participating investors. Investors value stocks based on how much value they expect the stock to produce now and in the future. So, the stability of the stock prices is a reflection of the accuracy of the investors predictions. Investor naivity can be seen as a sequence of increasingly sophisticated stock pricing strategies: If investors were able to predict the future perfectly, then all stock prices would rise at the same constant rate. In theory, if a particular investor is able to ""beat the market"", it is because they are better at predicting the future profits of companies (or they are lucky, or they are better at predicting the irrational behavior of other investors......)" "Vitalik has mentioned this in a comment but I think it ought to be expanded upon: Companies that aren't already penny stocks really don't stand to gain anything from trying to prevent short interest.  Short selling does not inherently lower the stock price - not any more so than any other kind of selling.  When somebody shorts a stock, it's simply borrowed from another investor's margin; as long as it's not a naked short resulting in an FTD (Failure To Deliver) then it does not add any ""artificial"" selling pressure. In fact, shorting can actually drive the price up in the long term due to stops and margin calls.  Not a guarantee, of course, but if a rally occurs then a high short interest can cause a cascade effect from the short ""squeeze"", resulting in an even bigger rally than what would have occurred with zero short interest.  Many investors actually treat a high short interest as a bullish signal. Compare with margin buying - essentially the opposite of short selling - which has the opposite effect.  If investors buy stocks on margin, then if the value of that stock decreases too rapidly they will be forced to sell, which can cause the exact same cascade effect as a short interest but in the opposite direction.  Shorting is (in a sense) evening out the odds by inflating the buying pressure at lower stock prices when the borrowers decide to cover and take profits. Bottom line is that, aside from (illegal) insider trading, it doesn't do businesses any good to try to manipulate their stock price or any trading activity.  Yes, a company can raise capital by selling additional common shares, but a split really has no effect on the amount of capital they'd be able to raise because it doesn't change the actual market cap, and a dilution is a dilution regardless of the current stock price.  If a company's market cap is $1 billion then it doesn't matter if they issue 1 million shares at $50.00 each or 10 million shares at $5.00 each; either way it nets them $50 million from the sale and causes a 5% dilution, to which the market will react accordingly. They don't do it because there'd be no point." &gt;First of all QE is an increase of money supply but using non conventional measures(there might be exceptions) some examples of this measures are changing interest rates or TLTRO.  Ok, but how is this different from printing money? I mean the money supply goes up in both cases, right? Shouldn´t this cause massive inflation?  &gt;As to why this hasnt transitioned into more inflation, which in the end has but years after, has been a question that people have asked a lot. One of the reasons for this is the transmission mechanism not working properly, which implies that despite the fact banks have received money, they havent been able to move it to the real economy hence not increasing prices.  I have read that all QE has done is basically make the prices of assets such as housing, stocks, art and whatnot skyrocket. As if all the extra money has gone to a very few, specific areas while not touching the rest of the economy.  Is this something you agree with? Thanks for your reply, btw! "Suppose you have $100 today and suppose that hamburgers cost $5. If you are holding $100, you could buy 20 hamburgers at $5 each. Now suppose you take that $100 and stuff it under your mattress for 24 years. When you pull out your money, you still have $100, but it turns out hamburgers now cost $10.   The increase from $5 to $10 is inflation.   Your savings of $100 was ""eroded"" by half even though before and after you had $100 and now you can only buy 10 hamburgers instead of 20 hamburgers. Suppose inflation is 3%.   That means that if you earn 3% return on your investments, you'll stay even with inflation (If you can buy 20 hamburgers today, then at any point you can still buy 20 hamburgers).   If you want your money to grow in a real, tangible way you'll want to seek returns that beat the rate of inflation."