The Dumbest Thing You’ll Hear All Day
- Joshua M Brown
- December 13th, 2012
"The Fed's QE half life is now down to 30 minutes of effectiveness."
Since yesterday's announcement of QE4 and the subsequent lackluster stock market performance over the ensuing three hours, I've been hearing this same idiotic thing repeated over and over again. I just want to quickly address it and put it to bed, because its a totally useless insight.
First, the Fed is not a daytrader. They certainly don't make an announcement about hundreds of billions of asset purchases with the intention to "mark the close" on the day they announce. Rather, what they are attempting to do is provide more time for housing to get off the mat and to push investors into riskier assets to improve credit conditions, balance sheet flexibility, and, indirectly, consumer confidence.
I'm sorry to inform those who are perpetually rooting for the next cataclysmic shoe to drop, but so far they're accomplishing these goals (even if not their greater, overarching goal - improving employment). The housing market recovery is no longer up for discussion and one needs look no further than the inflows into high yield debt of all sorts to check off the "riskier assets" box on their scorecards. As for consumer confidence, I am not a believer that the stock market is very important for the wealth effect (impact from housing is 10x that of the Dow Jones) but a glance at the market-leading consumer discretionary sector should tell you all you need to know about that.
In addition, I'd like to call your attention to the launch of QE2, in the fall of 2010 in the chart below:
It was met with a month-long sell-off of massive brutality before the market was able to figure out what was going on. And when it did, the stock market went ballistic straight into the spring of 2011, a major run fueled almost entirely by the ocean of cash coming into the system. The market's first reaction is not always the correct one - it was not two years ago and it may not be now - only time will tell.
But to pronounce a trillion-dollar program like this "DOA" after only a few hours' worth of trading is moronic. Please tune out the Twitter-addled, short-term myopics who do so. They're living in a different world, one in which every headline is "playable" and every jerk in market has some kind of meaning.
The Fed will continue to make cash intermediate-term inhospitable and bonds asymmetrically risky.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.