Since there is clearly a great deal of confusion over my position on QE please allow me to reiterate. My position is that there is no fundamental reason for equities to sustain gains due to a quantitative easing program. That is not the same as saying that equities can’t move in the short-term. Equities move for any number of reasons in the short-term – many of which are entirely irrational. Ben Graham once described the stock market as follows:
“In the short run it's a voting machine, but in the long run it's a weighing machine.”
The votes are in and they are unanimous. Equity investors are voting that QE will do something for the economy. However, that does not mean it will do something for the economy. If QE somehow results in economic recovery down the line I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place). At that point, the market will have weighed the facts and conclude that Ben Bernanke was in fact correct to push for higher asset prices. So, then we have to ask ourselves – what if QE really works?
Aside from the operational facts regarding QE there are still incredible hazards regarding such a policy. If this indeed works (pushing up asset prices) then why don’t we just perpetually perform QE? Why don’t we just sustain asset prices “higher than they otherwise would be”? The very idea of this as an economic strategy is frightening in my opinion. If QE actually works then there is no need for fundamentals. Why does anyone get up in the morning and go to work? We can all just go out and open an ETrade account and let Ben pour money into our accounts. Unfortunately, that’s not the way economics works. You would have thought that we’d have learned this after two bubbles in less than ten years, but no. Here we are again. Some of this appears like common sense, but as Mark Twain once said: “common sense is not so common.” Personally, I wish it was this easy. I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe. Or would it?
Place your votes in the short-term. But don’t forget that you could get crushed by the weighing machine in the long-term.
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This is what worries me. What if it does work? Then what? Then, every time the market dips 10% the Fed will be pressured to use this new policy. What then? What have we become then? That is not a market. That is just a game. A rigged game. I am far from a conspiracy theorist, but this whole thing just doesn’t smell right. Even if it does work it seems obvious that it will create all sorts of problems in the future.
What have we done?
It’s a game alright. It’s the end game for the infinite growth model through credit that asset prices are based on.
And what happens when that ends? Someone will want their money back at some point and be the domino that topples the whole game. What then? Then we suffer the greatest market collapse since the great depression because people have lost faith in everything. We get a total government overhaul. Everyone gets kicked out and the rules get rewritten to prevent this from ever happening again.
It seems great that this is working so far, but the fact that it is working is more frightening than the idea that it does not work.
“It seems great that this is working so far, but the fact that it is working is more frightening than the idea that it does not work.”
That might be the best comment on QE I’ve ever read.
I am an old man TPC. I have lived through a lot in my life, but I can’t remember ever seeing this short of brazen hubris from our government officials. They will do anything to keep the party from ending. I’ve lived through a lot of tough times in my life and it always made me a better person. I am scared for our young people. Will they ever learn what it’s like to face consequences? I don’t know what will happen in the future and I might not even be around to experience it, but I am very scared by the precedent that has been set in recent years.
Also, shanks for this site. I read it every day. Don’t let the hate filled comments bring you down. If you don’t have any enemies you haven’t done anything with your life.
thanks.
Thank you FDO. I am sort of at a loss for words given what has transpired in recent months. Ben Bernanke did not predict this crisis, he responded too late to it, and when he finally did respond he saved the banks. Now he is trying to prop up Main Street by boosting asset prices. I am astounded by the fact that he would publicly admit to trying this when Greenspan’s career was destroyed for having done the same thing with housing. But hey, maybe it’s different this time, right?
Equities have gone nowhere when denominated in Euros and Gold. Do you think the equities are saying things are getting better or simply doing a good job of keeping up with their changing denominator (USD)? I’m not sure we can read into the equity move as economic optimism.
A true bull market has a rising currency. After all, it is just devalued wealth otherwise.
Please tell me if i am getting this right.
We get QE2 and the US$ goes down against other currencies. I get that.
But the US$ will go down for only so long. At one point the free fall will have to stop. Afterall the US economy is bad, but there are quite a few loose cannons out there in EU for instance to take over the currency falling. At one point traders will stop looking at the USA only and take a look at Japan, that is just about to debase its Yen once again, China will increase its interest rate, etc. Events that will increase the value of the US$. So, it seems to me that QE2 is not the driver but rather the US$.
Correct me if I am wrong so far … and I am getting to my point.
So if I am right, what we saw today with S&P going up 2%, when we already had this whole QE2 thing all baked in, seems like an over reaction to the QE2 annoucement. Afterall, unless I am mistaken, QE2 was not physically starting today. So, again what is that 2% up today? If the driver is really QE2 and not the US$ then are we to expect a 2% up everyday for the next 8 months?
TPC … forgot! Great chart. Thx.
Exactly, I’m surprised TPC can draw a conclusion that the market has voted an economic recovery, to me, it is a vote that stock market is going higher, nothing more. No one knows exactly what the economy will be, but FED has guaranteed that stock market will go higher.
Maybe our Fed is just showing their human side. Maybe they are just feeling competitive with Communist China, and want to show the world that we are the best at micro-managing capitalism.
Other countries may have something to say about this. I was just in Vietnam last week. Inflation was 1% in September alone and they have price controls in place. Any exporting country especially those that rely mostly on exports for jobs, like China, Vietnam, Brazil even Japan although they have a strong consumer economy but prices deflating, are going to get some serious inflation if they sit back.
OZ and Canada being big resource exporters, there numbers are now coming in weak, retail sales, Oz trade balance decresed by nearly 4bil in Oct, PMI in Canada this morning was massive miss expected 69, actual was 56!
Export countries in Europe who are not as efficent as Germany surley cannot handle the euro at these levels
Seems like the effects of this may come from elsewhere
TPC – I think you erred in your initial assumption:
“Equity investors are voting that QE will do something for the economy.
In my opinion, equity investors are voting that QE will do something for equity prices. The economy is irrelevant. We know, because we JUST went through this, that an asset bubble as a way to get people to borrow and spend (off their inflated asset values) isn’t a very good solution for the long term… Yet we try it again – for some inexplicable reason (actually, I know the reason – it’s because the truth – that a lot of pain is necessary – is too hard for politicians to tell the People)
I very much agree with your last paragraph. Ponzi finance. the cliff keeps getting pushed back, but we’re making it higher too…
Okay, so what does it mean then? It means everyone is betting that QE will prop up the market. Okay. But where does it end? The Fed just keeps the program going forever and ever? Markets stay elevated forever? No one ever sells? At some point the music stops. It always does. And when it does people will try to find their seats. But when you run a ponzi scheme there are never enough seats for everyone. That is the future.
maybe you misinterpreted me overall. I very much agree with you on that. I think it’s terrifying.
I guess the “solution” is that savers continue to get punished. Prudence gets punished – confiscated away (via inflation – and anyone who doesn’t think we have inflation doesn’t understand inflation: LOOK AT ASSET PRICES!), while risk taking gets rewarded and debt gets inflated away.
I think people have been misinterpreting my thoughts on the market. I have never said equities wouldn’t rally on this news. In fact, I have consistently said that I would not be one bit surprised to see the April highs.
I know I don’t detail trades on the site, but on Twitter two weeks ago I wrote:
“Would add into any move over 1200. Would LOVE to see 1220″
My position is that the market is misinterpreting the economic impact of QE in the long-term. My market position has always been that we could rally to these levels and that at these levels the market has become overly optimistic. If I am wrong I will lose some money and move on. It’s part of the business.
Jeremy Grantham’s piece several months ago made the point that I think you’re trying to make. He basically said that the Fed could drive the SPX to 1600 if they want to – but that it will be a disaster if they do when it comes time to return to reality.
I understand you, TPC, and very much agree with you. new bubbles are not solutions.
A rather amusing twist on all this is that the greatest equity rally ever in the 90s coincided with a very strong dollar, obviously because capital flowed to the world’s most growth optimistic and innovative country – the US.
It is very entertaining/scary/illustrative to point out that equity rallies can now only be sustained via the devaluation of the dollar and hence, the inflation of any asset that is priced in dollars.
Is that where we’re at?
My vote is that the inequality gap in the US is what ultimately make the music stop. The Fed’s plan is basically to make the rich even richer and hope that some of that trickles down to the rest of the economy. Unfortunately, instead of trickling down capital is going to flee to ex-US markets and commodities. As a result the non-wealthy are going to be faced with higher inflation and a fairly stagnant economy while at the same time bombarded by messages about how good life is if you are wealty and stories about record art and Manhattan condo prices. At some point those who consider themselves “have nots” (I’m guessing ~60% of the country at this point) will realize they are a massive voting contingent and will start to vote in 3rd party candidates who move the country towards massive wealth redistriubtion and dissolving the Fed.
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