For several months, Peter Schiff, president of Euro Pacific Capital and author of “Crash Proof,” has been talking about how the Federal Reserve will either reverse its tapering efforts of quantitative easing or revive QE once the markets experience a freefall and extreme volatility.
In the past month or two, markets have been volatile, which has caused some pundits and Fed officials to discuss the possibility of introducing a fourth round of billion-dollar purchases of Treasuries and mortgage-backed securities. What contrarian investors expect is that Wall Street will fall off the bicycle because the United States central bank has taken off the training wheels.
Another analogy would be contrarian investors expect the stimulus addicted Wall Street to tumble as it needs extra monetary injection.
Schiff published an op-ed piece on Real Clear Markets on Saturday to opine on this very same matter. The outspoken critic of the century-old institution wrote that stocks have been relying on QE since the economic collapse transpired; moving forward, will stocks perish without it?
Most financial experts and CNBC analysts would scoff at this notion, but Schiff provided some interesting data on how much the Fed has influenced U.S. markets since the Great Recession started back in 2008: $600 billion in mortgage-backed securities and agency debt (QE1), which was extended to $750 billion a year later. This caused the Fed to increase its balance sheet to $1.43 trillion.
The S&PT 500, meanwhile, experienced a substantial rally of 71 percent.
“But from April to November 2010, with QE on hiatus and the Fed’s balance sheet hardly expanding, stocks declined by about 11%. But when Fed Chairman Ben Bernanke strongly hinted in August 2010 that the Fed was ready to launch another round of QE, the markets rallied 18% in five months. By the time QE2 ran its course, the Fed’ balance sheet had swelled by 29.4%, and the S&P 500 had rallied about 25%.”
The narrative has been pretty much the same over the last few years: when QE went on brief hiatuses, the market tumble, and when QE was reinstated, the market soared
“But now that QE is apparently a thing of the past, it is alarming how little anxiety has been sown on Wall Street. To be bullish on stocks now, one must completely ignore not only the role QE played in driving up stock prices over the past six years, but discount any negative effects that a reduction of the Fed’s balance sheet could create. Most economists recognize that to normalize policy the Fed must reduce the amount of securities it holds. Logical analysis should lead you to believe that stocks would not fare well.”
Schiff noted that he doesn’t expect a market crash, but rather a return to QE because the Fed will realize that without any stimulus then the markets won’t rally, soar or be on a bullish run of some kind. In other words, the Fed will reintroduce QE if Wall Street “screams loud enough for support.”
“It’s also possible that the Fed will re-launch QE even if stocks don’t fall. That’s because low inflation is conveniently emerging as its biggest fear. However, in another article in my newsletter, I show that this concern is a recent development designed to prepare the country for more stimulus, even if the stock market says we don’t need it.”
Other countries are instituting or expanding their own easing initiatives, such as Japan and the European Union.
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