–There is a falsehood constantly perpetuated by the media that the end of Quantitative Easing (QE) will be bad for the market and you should worry about it.
–This is hard to imagine given that the emergency which brought us QE has passed, and QE’s ability to keep rates lower may be greatly exaggerated.
–Why is it that Chairman Powell won’t come right out and say this to calm markets?
— A recent spike in bearish sentiment caused a certain visible market (so-called) expert to call on his minions to sell. Based on history this call may be as good a counter indicator as you will ever get.
— Don’t let them scare you out of your stocks!
The Big Lie: the end of QE will be bad for the market
“Here’s what will happen when the Fed’s ‘tapering’ starts, and why you should care” (CNBC Pro required to access)
The crux of the argument provided by CNBC finance editor, Jeff Cox (a.k.a. The “Bad news Bearer”–published June 6, 2013)
“The purchases (QE, $120 billion a month) have helped keep interest rates low, provided support to markets that malfunctioned badly at the start of the pandemic crisis, and coincided with a powerful run for the stock market.”
The article implies this could be very troublesome for the market even though the emergency it was intend to ease has passed.
Jeff Cox
At no place in Mr. Cox’s article is there any perspective given with regard to removal of QE versus its daily impact on trading volume (demand or supply). This is very important and an investor needs to know this to ascertain just how big the daily impact of the Fed’s bond buying might be in keeping rates low. I’ve gone over this point countless times in past kortsessions and my take is it is tiny and will not be missed.
If you do the math on a 20-day trading month, the $120 billion monthly purchases works out to $6 billion daily ($3 billion in longer-dated Treasuries (7 years and out) and $3 billion in mortgage-backed securities). The longer-dated treasury market trades on average over $200 billion in volume daily (SIFMA). $3 billion in demand is less than 1.5% of that volume. I contend it will not be missed when it goes away, and if they unwind by selling $3 billion a day it will be a de minimus addition to supply.
Of course, if Cox put these facts in the story it would lack teeth, the fear factor the media uses to keep your attention. His CNBC bio states the following:
“His stories are routinely among the most-read items on the site each day …”
Hmm, no wonder he is so successful.
Beware, the media will be full of stories like this as we approach the taper. They will be “full of sound and fury signifying nothing.”
Why doesn’t Powell explain this to the markets?
The simple answer is, he can’t. QE has been a powerful psychological tool. Creating all those bank reserves is comforting but if nobody is borrowing it is really not boosting the economy. We’ve already discussed the minute effect QE may have on rates. If you point all of this out the positive psychological benefit goes away. Quantitative easing becomes lost as an emergency tool to bolster confidence and the economy. In other words if the reserves being laid on by the central bank via QE are not being borrowed and spent, there is no economic benefit except the psychological benefit of knowing that the liquidity exists.
“If you need the money any time in the next five years, sell now.”
Who made this call, when and where? It was Jim Cramer, October 6, 2008 on the Today Show. Here’s the video. The S&P 500 closed that day at 1059 (down almost 500 points from its 2007 all-time-high). It would go lower, eventually touching 666 before beginning the secular bull market we’ve enjoy for the last eleven years. The result, if you owned and held the index after his recommendation to sell, was that you would have had nearly a five-bagger from his sell recommendation. Also you would have been holding an asset yielding 2% (that subsequently had increasing dividends). If you had sold chances are you would not have followed Cramer back into the market when he quietly changed his tune in March of 2009. I’m pretty sure that those who got his market call on the Today Show did not hear his timid return to stocks because he did not report back there with his change of heart. In fact, I have searched high and low for Cramer’s call back in 2009 where he semi-sounded an ‘all clear’ to begin investing again and cannot find it. Importantly, by the time five years passed the S&P was making new highs, a trend that has continued to this day. All during that five year period the preponderance of media opinion was bearish … avoid stocks … there is yet another shoe to drop.
Back to the point of this post … media malpractice
It seems like the Cramers of this world never seem to learn that their words have consequences, especially when there is a choir backing them singing the same negative tune. Last week, if you were already skittish about the ‘wall of worry’ that the media was building over the previous five trading days, you might have actually sold. Monday’s collapse may have been a direct result of the barrage of negative talking-head advice leading up to it. The following comment from Jim Cramer, 3 minutes before the market opened, may have been the straw that broke the camel’s back.
“Cramer advises investors to sell stocks, says it’s too soon to consider buying the September slide.” (you will need to be a CNBC Pro subscriber to view)
Mr.Cramer issued this advice at 9:26 AM EDT, Monday September 20. that day was the best buying opportunity in weeks and it came on the back of Cramer hitting the panic button. He was worried about so many things: “the fears of a collapse of embattled Chinese property developer Evergrande Group, the fight in the U.S. over raising the debt ceiling, and questions surrounding this week’s Federal Reserve meeting and hints on when central bankers might start tapering their bond purchases.”
By 7:15 PM EDT, Wednesday September 22, he had change his toon
” … Two of his biggest worries about the stock market are now off the table.”–China/Evergrande imploding into a contagious financial situation and drastic measures by the Fed. (the all clear signal)
Give me a break! How do you use this stuff other by than using Cramer as a good contrary indicator? Why are these prognostications even allowed airtime by a cable channel professing to help and support investors with information and keen insights. Why does CNBC have an audience other than to provide the consensus du jour of bad investment advice … something for serious investors to bet against?
My advice continues to be: don’t let them scare you out of your stocks.
What do you think?