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What is Quantitative Easing? Fed’s Perspective and Writings

Stock-Markets / Quantitative Easing Oct 28, 2010 - 03:29 AM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleA Wall Street Journal article (10/27/10) on quantitative easing (QE) hints the Fed will take a middle of the road approach in terms of the size and duration of QE2. As we would expect, the stock and commodity markets’ initial reaction is negative. A middle of the road approach to QE seems counter intuitive to the Fed’s own historical analysis of why quantitative easing was ineffective in Japan. In CCM’s July 2010 review of James Bullard’s Seven Faces of “The Peril”, our read between the lines interpretation of Bullard’s take on QE included:


In order for quantitative easing to sufficiently increase future inflation expectations, market participants must believe the Fed will do “whatever it takes for as long as necessary” to obtain the objective of sufficiently positive inflation. This means the Fed must be willing to leave balance sheet expansion in place for as long as necessary to create expectations of higher future inflation by market participants (consumers, investors, companies, etc.). This reminds us of past “bazooka-like” policy moves, where policymakers would say, “You think we can’t create positive inflation? Just watch.”

The key to next week’s Fed statement on QE will be how they address the concept of “whatever it takes for as long as necessary”. We can use gold and the U.S. dollar to monitor the market’s reaction to QE2. On October 11th in U.S. Dollar Could Rally In Coming Weeks, we hypothesized QE2 could be a “buy the rumor, sell the news event” relative to risk assets. Since October 11th, the dollar index has moved from 77.18 as high as 78.36; a move above 78.36 would increase the odds of the U.S. dollar having a multi-week countertrend rally. On October 13th with the S&P trading at 1,169, we listed 1,196 as a possible short-term upside target.

The S&P 500’s intraday high on October 25th was 1,196, which means we have entered a zone where the odds of a short-to-intermediate-term reversal have increased (emphasis on odds). Stock market breadth on October 26th was weak, adding to the list of concerns over the next few days. We recently mentioned some yellow flags in the gold market. Thus far, gold is holding up well enough that a push to new highs still could be in the cards. From a short-term bearish perspective, a break of the thin blue trendline below would increase our concerns about a correction in gold. The long-term fundamentals for gold remain sound.

What is quantitative easing? - Video: In part three of our six part series on quantitative easing, we examine Fed statements, writings, and publications related to the objectives of, and rationale behind, QE2. The analysis of some key Fed commentary on quantitative easing allows us to better understand the Fed’s perspective relative to QE’s possible impact on the financial markets, investing, the economy, interest rates, asset prices, and the wealth effect. Today’s quantitative easing video also touches on the following:

  • Duration of QE program
  • Consumption
  • Investment
  • Ben Bernanke’s “printing press” speech
  • U.S. dollar devaluation
  • Fiat / paper money system
  • Spending
  • Inflation
  • Dividend-paying securities (video player below)

Above is Part 3 in the QE series; previous QE videos:

By Chris Ciovacco
Ciovacco Capital Management

    Copyright (C) 2009 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

    Chris Ciovacco Archive

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