QE Aftermath — Brace For Impact


Listening to CNBC this morning is nauseating, quite frankly, especially Cramer.

I know, I know, the market is up.  It was up 200pts yesterday and this morning the futures are higher.  But the reality is that despite people saying “keeping cash in the bank is a fool’s game” that logic discounts the risk in equities, and there is risk in equities.

Lots of it, in point of fact.

Bernanke’s statement was that he would keep QEing until unemployment falls to where he wants it.

What happens if it does not come down at all, but rather goes up?

I want you to pay attention to this chart:

This is the population-adjusted change in employment on a monthly basis.


Now here’s the ugly truth — QE has not only failed, it has massively failed.

QE began in November of 2008.

During that time the labor participation rate fell, flat-lined, and has refused to recover.

The evidence is clear: QE doesn’t work to stimulate employment, it instead destroys jobs.

The reason it doesn’t work is that it can’t; QE by definition debases purchasing power as it increases the denominator of credit and money.  It is simply a sop to those who buy and speculate in the financial markets (in this case, in mortgages) but the positive effects on home prices are tiny.  If we get a 50 basis point move in mortgages (unlikely; the more likely move is 25bps) then the price support is only 3%!  If the more-reasonable expectation of 25bps is realized then the price support is 1.5%!

This is so tiny as to be beyond “marginal” and well-into the range of utterly insignificant and immaterial to the real economy.

As an investor, therefore, what should you expect?

  • The speculative “burst” higher may be maintained for a while, however….
  • When it wears off, and it will, equity prices will slide and accelerate, as if employment does not meaningfully improve then the market will come to realize that Bernanke’s plan has failed — as the evidence shows it already has.

The result?  Something very similar to what happened in Japan, where over time the effect of “QE to the moon!” faded and the Nikkei never managed to actually recover it’s former levels.

20 years on the Nikkei stands at roughly 1/4 of where it was at their top.

Now that’s something sobering to think about.

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