In my “This Morning’s Reads”, I linked to a post by Cullen Roche on his Pragmatic Capitalism blog titled, “Why QE is not working”. It’s a short, but detailed assessment. The bottom line to Cullen’s argument is that QE is ineffective because interest rates “are not altered that much” and loans are not induced as a result of the stimulus.
Technically speaking, Cullen makes a good case. However, I’m not sure Fed Chairman Bernanke would share an identical measurement for success. I believe that Fed Chairman Bernanke is attempting to show investors that he has the power to reduce interest rates (even slightly given such a slow growth/low rate environment) and, at the same time, raise the price of risky assets. In fact, this is what he told us. Remember Ben Bernanke wrote an unprecedented piece in the Washington Post in November 2010 where he layed out the case for propping up the stock market through bond buying programs. Part of what he said was this:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Whether Bernanke has influenced interest rates on a large-scale is debatable (Cullen says “not much”), but it is clear to me that Bernanke has influenced stock prices. I wrote about this in a previous post (Is the stock market’s rise due to QE or fundamental reasons?). Much of this happens to be caused by perception trumping reality–at least temporarily. And if this in fact true that QE is propping up equity prices, then one could indeed consider QE successful.
From a portfolio management perspective, I find three simple reasons for the 8+ week rally in equity markets:
- The hope of more QE to be announced at the September Jackson Hole meeting;
- Europe has been temporarily taken off the table. Like the topic of QE, September will be an important month for Europe as there are several key events scheduled;
- Bottom line earnings are good enough, even though top line revenues are weak, to justify higher stock prices in the context of more QE and a silent Europe.
You have to be positioned to take advantage of these higher stock prices. However, as markets rally even higher and as we approach an important September that can lead to disappointment if expectations are not met, we will remain nimble.