re: Economics Book Club (EBC): Book 4 Starts Aug 21 (The Smartest Guys in the Room)

There's no doubt expansion of the monetary base has led to a sustained rise in stock prices, but that's not the most proximate cause, in my opinion. Sure, it may be the ultimate cause, but the more direct cause is that historically low interest rates have allowed companies to engage in a level of financial engineering that is perhaps unprecedented in modern history. This ranges from simple refinancings to recapitalizations and even to debt issuances for the express purpose of funding share buybacks and dividends. In the aggregate, we've seen a market-wide and relatively massive decrease in the weighted average cost of capital which, given the lower implied discount rate, has resulted in higher equity valuations. As the tide goes back out, we'll see who can actually support the debt. The only thing that will burst the bubble will be a large increase in interest rates or reaching the point of maximum aggregate debt capacity. We could be close to both, but where else is there to put your money? The bond market is also arguably in bubble territory.