The analogy that I have started to use recently is that of a pressure gauge. Money has to flow somewhere. The US just dumped a ton of money into the economy whe

The analogy that I have started to use recently is that of a pressure gauge. Money has to flow somewhere. The US just dumped a ton of money into the economy when the pipe (ability of the economy to move a lot of money between a large number of people, aka bandwidth) is essentially static, not much wage growth, little hiring, etc. That money has to go somewhere, so it goes to the stock market, because that is where the pressure is the lowest (very easy to call up a broker or go online and dump money into an account, compared to say, hiring and employee that can add real value to your company and the economy in exchange for a paycheck). Most of the time people assume that companies are going to take the money they get from stocks and invest it in growing the company or in paying salaries or paying for goods that pay salaries, etc. Unfortunately the corps are all sitting on loads of cash, and buying back stock, and not hiring or expanding (on average). As a result? Money that we normally expect to be growing the pipe, increasing the bandwidth of the economy to do real work, is instead flowing back into the pressure gauge and up goes the pressure, zoom! The economy is doing great! Right?? No. It is hard to get a good measure of the bandwidth of the pipe, and trying to interpret the pressure without it is folly, especially with regard to the impact of reducing the money supply (incoming volume of water). When the flow through the pipe is large and there is high bandwidth and the pressure is high, and the money supply drops, then we would expect the pressure to come down a bit, but in general to be stable essentially due to high inertia in the primary pipe, but if the total bandwidth is low? Then the pressure gauge is going to plummet, because the increased pressure (stock value) was due to a large flow trying to fit into a small pipe, and that pressure increase was due primarily to the change in the money supply, not due to fundamental soundness of the current economy (inertia). Not a perfect analogy, with plenty of mixed metaphors, but simple enough to reason about and see where it breaks down. tl;dr economy is flow in pipe, stock market is pressure gauge, if you don't know the flow through the primary pipe (hard to measure directly), then your pressure gauge could be extremely, dangerously misleading