YOUR MIND ON MONEY: QE may be more coincidental than causational

2013-12-12T09:45:00Z 2013-12-12T15:56:51Z YOUR MIND ON MONEY: QE may be more coincidental than causationalF. Marc Ruiz Times Business Columnist
December 12, 2013 9:45 am  • 

As has been said, the “business of America is business," and we are very good at it.

Despite the rumors of its demise, the American economy, as a reflection of her people, continues to innovate, generate profits and create wealth. The stock market as a reflection of our economy is flirting with new highs on an almost weekly basis.

But we do have our challenges. The aggressive policies enacted in response to the 2008 financial crisis have become in my opinion an outright distraction for investors. The primary potential distraction among these policies is, of course, the Federal Reserve’s bond buying quantitative easing (QE) program. This extreme form of monetary stimulus involves the Fed creating new money and using this money to buy bonds through the financial markets.

Now it is sometimes hard to argue with results, or even extreme coincidence. The stock market rally which continues to this day started literally with the announcement of the first QE program in March 2009, and many of the pundits I follow believe wholeheartily the rally could not continue without these artificial sweetener programs.

When something is said emphatically and repeatedly enough, it sometimes becomes misconstrued for truth, and there are those investors who are basing their market outlook almost entirely on the likelihood of continuing QE. For these investors, good economic news is met with dismay as it is widely accepted that once the economy is on solid footing again, the QE programs will end and thus the rally.

But is QE the primary engine of the market rally?

The Fed is currently infusing the bond market with $85 billion per month. The conduit for this money is the Fed’s purchase of U.S. Treasury and U.S. Agency backed mortgage securities. The primary counterpartys to these transactions (i.e the sellers) are large banks. As these banks sell bonds the money received goes into reserves, where it tends to stay.

Through indirect means, some of this bank money invariably ends up being invested in stock market-based strategies, but to conclude this process is efficient or even remotely close to being dollar for dollar is a logical stretch.

What is easier to argue is QE has been effective at keeping interest rates low, which creates an environment that promotes growth and profits. This low interest rate environment has also made other forms of investment such as bonds, CDs and money markets completely unattractive, which in theory is driving money toward stocks.

When viewing QE through this more limited perspective, however, the program becomes much less of a distraction.

QE soon will begin to end and smart money says interest rates will probably rise some. As the bull market continues, however, it seems less and less logical to place too much importance on a program which may in hindsight be viewed as more coincidental than causational.

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