I don't think this contradicts DCF models. You have to take a step back and look at the big picture. In a complex system, it always depends which variables you hold constant, and which will change as a result of other variables changing.This contradicts DCF models for valuing stocks.
Like the WSJ alluded to, my understanding is that monetary policy can just re-allocate wealth in the short run - re-allocate between owners of real and paper assets, and/or between present and future economic activity, i.e. make people consume more now at the expense of future consumption or welfare. I think theoretically if a central bank or government prints more money, this would naturally lead to currency devaluation by rational market participants, all other things being equal. Setting aside some minor and questionable secondary effects, monetary policy cannot create wealth in the long run. Which kind of makes sense if you think of it really hard - you don't have to be an economist to do that: In aggregate, somebody has to create something in the real world and add real value to society at large in some way, for somebody to consume it at some point in time. Any kind of financial engineering can only be about re-shuffling wealth in one way or another, in space or time. An efficient market should normally see that. Monetary policy or government spending should not benefit expected average earnings in the long run, and therefore also not affect long-term market valuations.
Interest rates, a result of monetary policy, set the discount rate for valuing future earnings.
And on a practical level, high interest rates impact corporate behavior in many ways.
Tighter monetary policy impacts decisions to fund R&D, which definitely can create real wealth.
Without going too much into details because this could fill books, yes (real) discount rates, based on (real) risk-free rates, affect corporate earnings as well as "fair" equity valuations and multiples. But real risk-free rates are in the end and in the long run governed by supply and demand, and eventually by investors' and borrowers' preference for current vs. future consumption, i.e. the cost or the reward of storing or borrowing capital. Real fed policy rates perform a complicated dance around this equilibrium that in the long run is demanded and controlled by the market, thereby shifting economic activity back or forth on the timeline, and additionally reshuffling wealth between owners of real and paper (nominal / cash based) assets by shifting inflationary and deflationary shocks on the timeline as well, and/or possibly by adjusting inflation targets.
P.S.: I'm not an economist and probably didn't express myself scientifically correctly, but I try to look at the big picture and to practice independent thinking and deductive reasoning. Regardless of the details, I stand by my observation that real wealth in aggregate over space (people) and averaged over time, cannot be created or destroyed by monetary policy or any other sort of financial engineering on government, corporate, or individual levels.
As a result, to come back to the context of this thread, and setting some minor secondary effects aside, I also think that monetary policy or any other kind of financial engineering can not meaningfully affect relative stock market (real) performance between countries in the long run.
Statistics: Posted by comeinvest — Sat Mar 23, 2024 9:08 pm — Replies 5291 — Views 873057