Interesting piece: (Thanks to John Hunt)
ntrs.com
<<The price of stocks is determined like the price of anything - by the interplay between supply and demand. As the chart above indicates, the supply of stock has been shrinking in recent years. And, of course, we know that the household demand for them has been skyrocketing, in part, because they have returned a compound annual rate of 30% over the past four years. It sounds a bit circular, but maybe one of the reasons stocks have produced above-average returns for four consecutive years is that corporations have been making them scarcer.
How does the Fed enter into this? Actually, it's not the Fed, but the Fed's agents, banks, who enter into this. As the chart below shows, bank lending to corporations has shot up at the same time that corporate buybacks have increased. Funds are fungible, so the bank loans might not, themselves, been used to buyback stocks. But one way or another, they helped fund the buybacks.
So what? Well, if ban lenders start to tighten up their lending terms to corporations, which the Fed quarterly loan surveys suggest they are doing, there might not be as much credit available to corporations to buyback their stock at the recent hectic pace they have been doing it. In that case, with the supply of corporate stock not shrinking as fast, the prices of stocks might not rise as fast. They might even fall. (Yes, stock prices Do sometimes go down.) Because household consumption has been so dependent on a rising stock market of late, a flat-to-down market might depress consumer spending, one of the principal engines of U.S. economic growth in 1998. So, let's hope the Fed encourages banks to keep the loan spigot wide open for corporations, and households, too, while they are at it. >>
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