ANOTHER DRESS REHEARSAL FOR THE END OF QE

Another Dress Rehearsal for the End of QE (QUANTITATIVE EASING)

 

There is no mystery about what will happen when the Federal Reserve ends Quantitative Easing (QE) for good. We have had three dress rehearsals so far;

  1. Spring of 2010 when QE 1 ended the market collapsed by 1518 points (13.5%)
  1. Summer 2011 when QE 2 ended again the market collapsed by 2004 points (15.7%)
  1. June 19th – 24th, 2013 the DOW collapses 685 points in just five days at just the mention of a POSSIBLE SLOWDOWN IN QE 3.

QE is the unprecedented program by the Fed to pump money (liquidity) into the economy to keep it afloat and stimulate recovery. He is doing this in two ways;

  1. BUYING $85 billion worth of the bonds monthly from commercial banks. In return, the Fed wants the banks to loan out the money to consumers to spend in the economy. Unfortunately, the banks are hoarding the money. The little they have loaned out is all that is keeping the economy afloat.

 

  1. BUYING up 85% of the Treasury bonds, considered the safest investment issued, forces investors to buy higher risk assets like stock. Bernanke hopes that by investors seeing their stock portfolio go up, they will go out and spend. Forcing so much money into one asset, stocks, has created an ASSET BUBBLE, and asset bubbles break.

Following these three crashes the market eventually recovered. Can a case be made for having been in stocks throughout this period? We have discussed this before but I think it bears repeating.

  1. There was never any guarantee that Bernanke would continue buying $85 billion of Treasury bonds each month. Once he would announce, or even hint at an end, there is no lag time before the market reacts in which you could casually sell your stocks. It would be like catching a falling knife
  1. Speculators and investors could decide to bail out of the market at any moment since the “handwriting is on the wall” that QE MUST end. Again, there would be no warning.
  1. Why does the stock market have to crash and stay down when QE ends? Because normal markets are based on fundamentals and the fundamentals are terrible or we wouldn’t need QE.
  1. Why does QE have to end? The Federal Reserve has spent $3.1 Trillion dollars buying up government bonds. Where did the $3.1 trillion come from? We just printed it. This is very dangerous because it is highly inflationary and cannot continue indefinitely without destroying the economy. Only the big banks are profiting.
  1. How long is this situation going to continue? A day, a month, a year; no one knows not even Bernanke. What we do know is that Ben Bernanke (appointed by President Bush) will be replaced at the end of this year and President Obama, not a fan of Bernanke’s strategies, will then appoint a replacement.

As frustrating as it is to watch the market going up, imagine how you would have felt during the crashes of 2010, 2011, and 2013 if you had been invested in stocks? Think of it as you do your life insurance policy; you are paying premiums without any reward unless you pass away, then you’re covered. Just like death, the end of QE will happen and we are, and have been covered. As small investors we must have that insurance policy on our life savings.

Old habits die hard and we have this feeling that we must DO SOMETHING NOW and often we do exactly the wrong thing. Remember, in a crisis like we are currently in, it is best to be smart and wait for the dust to settle.

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