France’s CAC 40 Is Another Nail In The “Fed-As-Market-Opium” Narrative

France’s best-known stock index, the CAC 40, is up 18 percent over the last twenty-five years. The S&P 500 is up 24 percent over the last two months. These numbers rate comment.

For one, they vivify the stupidity of so-called “trade deficits” in the U.S. There’s no such thing, nor is there such thing as insufficient savings in the U.S. that are made up for by foreign savers.

More realistically, the United States is the world’s most economically dynamic country, one populated by the world’s greatest companies. See S&P returns over the last two months, two years, ten years, etc.

The CAC 40’s flat returns explain a broad desire among individuals the world over to export their savings to the U.S. so that they can import shares in the U.S.’s many great companies. In other words, the so-called “trade deficits” that keep politicians and pundits up at night, and that shrink the charitably worthless calculation that is GDP, are a powerful signal of economic strength. For the U.S.

A flat CAC 40 over twenty-five years also lays waste to a just-won’t-die notion that the Federal Reserve’s low rates have been the not-so-hidden source of stock market strength throughout the 21^st century. The view, a popular one inside the various U.S. economic religions, was always bogus.

That’s because markets logically gain strength from periods of weakness. It’s when equities are down or falling out of favor that the poor and mediocre are put out to the proverbial pasture so that they can be replaced by good and great.

To understand the meaning of the above, stop and contemplate the companies that dominated the S&P 500 in 2000. The biggest names included GE, Tyco, AOL, Enron, Yahoo, etc. Do any of the giants from 2000 list among the top U.S. companies today? Try the same exercise from 2010, 2015, and to some degree 2020. There’s your stock market rally. The Fed was so very much not the point.

Not convinced? Is the fallacious notion that “easy” central bank money elevates equity prices just too ingrained? If so, just spend some more time thinking about the CAC 40. And while thinking about it, check out ECB rates of interest during the 21st century.

As readers will see, the ECB wasn’t that different from the Fed. That it wasn’t raises the obvious question about why European indices didn’t rally in the way that the S&P 500 did. If it’s true as the various economic religions tell us that stock indices aren’t going up as much as central banks are providing “sugar highs” born of “easy money,” then where was the CAC 40 rally? The answer to the previous question is that while they revel in the immense powers ascribed to them by Austrians, monetarists, Keynesians, and supply siders, the happier truth is that central banks have no ability to alter reality. In other words, the CAC 40 hasn’t rallied precisely because France isn’t dense with great companies in the way that the U.S. is.

The simple, happy truth is that great companies power stock indices up, not central banks. That’s why the CAC 40 is flat, why the S&P 500 isn’t, and why copious amounts of foreign savings continue to make their way to the United States.