Monday 6 December 2010

Is quantitative easing the cause of the rally?

Tyler Durden at Zero Hedge thinks so, and offers the following graph to illustrate the correlation:

Correlation is not the same as causation: I'd be a little happier about this theory if the mechanism could be explained. How exactly did the Federal Reserve's purchase of government bonds force up stocks?

I suppose the effect was indirect, in that the stock market recovered confidence when it saw that interest rates would be kept low with this extra demand for government credit, so making debt-fuelled market speculation cheap and easy. Also the fear of a banking sector collapse eased as the policy of official support at all costs became clear.

I guess the new bubble is in government credit, and will continue to inflate until a weak seam in the fabric splits. Keynes said, "Markets can remain irrational longer than you can remain solvent"; similarly, governments can stay irrational longer than you can afford to short their darlings. I'd be in no hurry to bet on a market reversal, even though it "should" happen and the present state of affairs is not tenable indefinitely.

Which is why I grit my teeth and hold cash.

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AntiCitizenOne said...

The truth is...

There is No market at the moment.

It's totally rigged.

I don't try and invest at the moment, I just try and straddle and hope I can come out with some left.

AntiCitizenOne said...


The Arthurian said...

I'd be a little happier about this theory if the mechanism could be explained.

Your "indirect" effects would account for the market going up, but not for the correlation visible on the graph, I think.

Just intuitively... Printing money causes inflation. That QE money did not go to people struggling to pay their mortgages and their credit-card bills. It went to savers and investors, people who already owned the securities that the Fed was buying. So, that's the place where the "extra" money is, and it's leading to "asset price inflation" and stock price increases as in the graph you show.

If this analysis was correct, I wouldn't be the only one thinking it. So... what have I got wrong? I guess I'm not looking at "debt-fueled market speculation" ...