In the not-too-distant past, the stock market rewarded entrepreneurs who worked hard and had innovative ideas.
Today, the market is driven primarily by two things:
- Monetary policy. The Federal Reserve Board’s quantitative easing programs drive stock prices higher by making other securities less attractive.
- Computers. High-frequency trading (HFT), which is conducted by proprietary trading desks at big banks and private hedge funds, uses computers to make trading decisions and execute trades based on perceived pricing inefficiencies.
These two factors already dominate the market, but they are becoming even more dominant.
This past week saw Japan join the U.S. and Europe in seeking to jumpstart its economy with an asset-purchase program. The U.S., of course, announced QE3 last week and that announcement was preceded by a European Central Bank (ECB) announcement of a round of bond buying that Zerohedge.com called “an act of desperation.”
It used to be that company fundamentals drove share price. Well run companies were rewarded with higher share prices. Now, political appointees and computers determine share prices.
The key to improving employment and helping the economy is simple – set our markets free!