Quantitative easing is a monetary policy tool used by a central bank to try and stimulate an economy when the economic cycle is far below optimum levels. Central banks increase the quantity of money in the financial system through quantitative easing by purchasing securities, such as treasury bonds, to increase the price of assets; this will lower prevailing yields and entice investors into other areas that might be more beneficial for an economic rebound. One worry with quantitative easing is that the increase in the supply of money might lead to inflation, or the overall increase in the price of goods.
The S&P 500 may be entering bubble-like territory: that’s what I’ve been writing for the past few months.
Now, it appears as though I’m not the only one who’s worried about asset classes beginning to form bubbles from the excess money printing. 2013 Nobel Prize-winner Robert Shiller also recently stated that he is concerned that prices have risen far too quickly across many asset classes, from real estate to stocks.
As I’ve written several times over the past couple of months, investing in stocks at these elevated levels is quite risky. My belief is that much of the upward move in the S&P 500 has been primarily based on the liquidity (money printing) being pumped by the Federal Reserve.
Investing in stocks with this premise can only work for the very short-term trader who’s quick enough to get out when the tide begins to turn.
Because people are not investing in stocks based on actual fundamentals right now, one can’t expect the value in the S&P 500 to remain elevated once there’s a change in monetary policy, since much of the move has been artificially supported.
Let’s take a look at how the S&P 500 has been affected by monetary policy over the past few years, and how investing in stocks at the current level is becoming increasingly risky.
Chart courtesy of www.StockCharts.com
The first quantitative easing program by the Federal Reserve lasted from December 2008 until March 2010. This period is not shown on the chart above, as one could argue that the S&P 500 became extremely oversold and that investing in stocks for the long-term made sense at … Read More
For me, trading has always revolved around economic fundamentals and stock market analysis. And if you’re like me, you’re getting somewhat irritated with the recent trading in the stock market by investors who seem more inclined to trade on what economists at the Federal Reserve do with their quantitative easing strategy than on what’s really important—the underlying fundamentals of the economy and corporate America’s financial health.
The reality is that corporate America is struggling to grow revenues. This means that companies and consumers aren’t spending at levels that make me comfortable with the economy. Of course, the stock market doesn’t really seem to care; it simply wants the flow of cheap money to continue.
In my view, it’s the same old thing that continues to engulf the trading in the stock market, and it’s annoying. For instance, if we see strong non-jobs economic data, the stock market edges higher. If we see signs of strengthening in the jobs market, the stock market sells off.
Of course, that’s because the Fed has made it clear that jobs creation is the focal point that will dictate when the central bank will begin to taper its monthly bond buying program, an unprecedented policy that has added trillions of dollars of debt to the bank’s balance sheet.
While all eyes will be on the non-farm payrolls reading today, November’s ADP Employment Change reading released last Wednesday showed that 215,000 new jobs were created last month, which is well above the consensus estimate of 173,000 and the upwardly revised 184,000 jobs created in October. How did the stock market react to the good news? Negatively, … Read More
Recently, European Central Bank (ECB) policymaker Jens Weidmann said the strategy of printing money was not the solution to the eurozone crisis. (Source: Carrel, P., “Printing money not the way out of crisis: ECB’s Weidmann,” Yahoo! Finance, November 20, 2013.) Ya, no joke!
Of course, Weidmann was not referring to the Federal Reserve, but to thoughts from within the ECB that perhaps buying assets was another tool to use. He may as well be talking about the Federal Reserve’s quantitative easing strategy, though. I’m sure he’s been looking at the Federal Reserve’s massive money printing and its overall ineffectiveness; he’s likely studying the U.S. situation and realizing that the act of simply printing money is not the end-all for achieving success in rebuilding an economy.
There’s that old saying that you learn from other people’s mistakes—that’s what we have here.
The Federal Reserve continues to balk at stopping the money printing. Current Federal Reserve Chairman Ben Bernanke expressed his disappointment in the recent jobs market readings in a recent speech, saying there were insufficient reasons to stop the quantitative easing.
Five years of quantitative easing by the Federal Reserve and, while it clearly helped the country from a much deeper recession and breakdown, the benefits are stalling.
So I say to Weidmann, fight against the use of quantitative easing via printing money in the eurozone, as it will simply cost the eurozone hundreds of billions of euros and would likely do very little for the economy. The already historically record-low interest rates in the eurozone will suffice.
The same thing should be the case on this side of the Atlantic. … Read More