Jul 14, 2011

Alan Greenspan on the real reason the stock market has risen since 2009

There is an alternate explanation for the rise in the stock market, particularly since early 2009 and that is the  extraordinary increase in productivity in non-financial corporations. Not only labor productivity but productivity in energy, in the use of materials, and a number of other things. And if you construct that into a profit margin indicator, it directly causes a major rise in profit margins, a major rise in earnings, which we've seen. But, because of the so-called equity premium, the price people have to pay for stocks, or, I should say, that issuers have to pay for stocks, in order to get money relative to bonds, that is at the highest level in 50 years.

So, you have earnings pushing up against the structure of a very immobile equity premium and algebraically, the relationship of those two, is the stock price.

~Alan Greenspan, former chairman, Federal Reserve, CNBC interview, June 30, 2011

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