The "don’t fight the Fed" myth15 November, 2012, 13:27. Posted by Zarathustra
Despite a very much hyped QE-Infinity and that everyone says "don’t fight the Fed", US equities have not been performing as many would have expected after the announcement of what seems to be an unlimited money printing (which is not even true when you look at what the Fed’s balance sheet is actually doing). As noted before, US dollar is not higher than it was before the announcement, US stocks are now lower than it was before the announcement, and gold is also lower than it was before the announcement.
One major different between this round of QE and the previous two rounds is that the previous two major rounds of large scale asset purchases were announced or implied during periods of market tension, while QE-Infinity was started when there was arguably little market stress, as the chart below from Barclays Capital (which we posted here before) makes it clear.
Cullen Roche sums it up perfectly that the previous two rounds of quantitative easing seemed to work for the stock market because the market was stressed:
When Bernanke implemented QE1 the markets were in a death spiral. The government’s actions played a huge role in stabilizing prices. Sort of like the recent ECB intervention in European periphery bond markets. The government comes in and makes a market with their printing press and confidence returns as investors realize that you don’t bid against the guy with a printing press. So, QE1 “worked” in that it had a hugely stabilizing effect. QE2 was a bit different, but one could argue that it also had some stabilizing effect since markets had fallen substantially prior to the policy’s implementation. The subsequent market rallies gave the appearance that the Fed had saved the day.
But for QE-Infinity:
Instead of implementing QE low (following the old buy low, sell high mantra) Bernanke implemented QE after a huge “wealth effect” had already occurred. He wasn’t buying into a market decline like QE1 and QE2. He was essentially buying after the rumor had leaked.
As Ben Bernanke made it clear, the transmission mechanism of monetary policy now works through asset prices. By reducing interest rates and risk premium, thus boosting asset prices, it will hopefully has a wealth effect on consumers, who will then spend more, etc. But as QE-Infinity was implemented when there is little market tension and that corporate profit outlook started deteriorating, QE-Infinity does not seem to be as effective for the time being as far as boosting stock prices are concerned.