TAKING STOCK: The Japanese market and why the money supply pushes up U.S. stock prices

Dear Mr. Berko:

You have said often that the $85 billion a month the Federal Reserve injects into the banking system has forced stock prices to rise. Could you please explain why or how in simple layman's English? Also, could you recommend some Japanese stocks that trade in the U.S. market? An article I read in a business publication says that the Japanese market is due to have a run that could be better than the U.S. market's run. Could you recommend a few Japanese stocks that you think could run up with the Japanese averages? I have about $60,000 to invest and can afford moderate risks.

CW, El Paso, Texas

Dear CW:

As long as Ben "Santa Claus" Bernanke stuffs the stockings of the nation's big banks with $85 billion a month, the stock market will continue to rise. That money can't just lie fallow and grow mold in dark vaults; it must be put to work, and the most efficient way to put those billions to work is investing in the stock market. Now be mindful that $85 billion a month, over the period of 12 months, is a teeny jot over $1 trillion. Though a trillion dollars ain't worth what it used to be, it's helpful to put the number into perspective in relation to the stock market. The total value of publicly traded stocks on U.S. stock exchanges is about $16 trillion. And the total value of the stocks traded on the Standard & Poor's 500 index, which includes every stock in the Dow Jones industrial average, is $10 trillion. So Santa Claus Ben's trillion-dollar stocking stuffer represents 10 percent of U.S. stocks in the S&P 500. Now that's a lot of money chasing stocks owned by you, me, mutual and hedge funds, retirement plans, banks, other institutions, and the like. That $1 trillion a year equates to $2 billion per company listed in the S&P 500.

Do you know that $2 billion will buy you 20 percent of Campbell Soup Co., 18 percent of Clorox, 14 percent of Waste Management, 25 percent of Tiffany, 25 percent of Avon Products, 15 percent of Edison International, 24 percent of Western Union and so on? That ain't chopped liver. So when $85 billion of fresh money each month chases after those stocks and 493 others, they're going to rise in price. And the numbers becomes hugely larger because this money is often leveraged, and that leverage is how the housing bubble was created. Most folks don't realize that just a few years ago, the Fed's debt was about $500 million. Today - after the first round of quantitative easing and then QE2 and now QE3 - the Fed's debt is $3.2 trillion, and it's catching up to our national debt.

Japan's Nikkei 225, which is more than 14,000, is equivalent to our S&P 500, and back in 1990, it rose to more than 36,000. Yes, it probably will zoom again, because the Diet, Japan's parliament, under a new prime minister, Shinzo Abe, is taking advice from Santa Claus Ben. Abe has caused the Bank of Japan (like our Fed) to double and maybe even triple the Japanese money supply to spur inflation to jolt the economy. And jumpin' Jehoshaphat, the Nikkei already is taking off. Though I doubt the Nikkei will reach its 1990 level, the talk in Tokyo is that it could rise to 17,000, where it was in 2007, and even top 20,000 by early 2015.

I can pull some well-known, prestigious names out of a hat that may do very well over the coming year. But first, I'd like to talk to a few folks who are knowledgeable about the Japanese market. The next column should have some special selections to share with you. Meanwhile, I'm comfortable recommending the iShares MSCI Japan Index Fund, an exchange-traded fund (EWJ-$10.77) that owns more than 300 large-cap companies in the banking, electronics, entertainment, auto and drug industries. Buy it now.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Mon, May 13, 2013