What happens once QE2 ends?

[LGrand85]

-

[AdamA]

I was thinking about the returns of the PP over the past few years -- everything has gone up! What happens when the Fed stops printing money? Gold will drop, equities will drop, treasuries will drop.

Economics is not physics, so beware the linear X causes Y logic that can seem so flawless at times.  

Whenever I read an economic predicition that really resonates with me and strikes me as certain to be true, I've gotten in the habit of ignoring it.  This has saved me a lot of money...

The effects of QE have been debated ad nauseum...no one really knows what it will do.  Some think it will cause massive inflation. Others think that QE is basically spraying a garden hose into a tidal wave (I think that analogy belongs to Medium Tex), and believe we are more likely to experience prolonged deflation.  

Good arguments on both sides, but the  bottom line is that it's impossible to predict.  

“The best kept secret in the investing world: Almost nothing turns out as expected.”? – Harry Browne

My advice...don't try too hard to predict.  Stick to the plan.  Read what others think with an open mind, but don't tinker with the PP because of the things you read.  You'll hear all kinds of very logical arguments for all kinds of dramatic things that will convince you that each asset in the PP is doomed.  Just remember that no matter what anyone says, no matter what magazine or televion shows they're on or where their phd is from, they really don't know any better than you do what the future holds.  In the end it's all educated guessing (at best, usually it's just guessing).

If I had to predict what would happen in the situation you describe, I would bet on cash to perform simply due to supply and demand.  Fed stops printing dollars, dollars will become more valuable.  In this scenario, the cash portion of your PP should do well.  


Just my thoughts,
Adam

[MediumTex]

The only reason the Fed would stop printing would be if the economy got healthy again.

If the economy got healthy again, stocks would be expected to do well.

If stocks are doing well, that is plenty to keep the whole portfolio chugging along.

[moda0306]

Plus, the fed interest rate game doesn't necessarily work on the top rates.  If the fed were to quit printing now, and the stock market were to suffer, there would be deflation and a flight to safety and I believe top rates would go down.

That's the paradox of the fed's rate effect, IMO... it's not as simple as it seems.

[murphy_p_t]

to respond to the headline question, Jim Rickards, in this interview, posits that QE will continue onwards, even without further expansion of the Fed's balance sheet, as the proceeds of maturing bonds will be used to purchase new bonds. apparently, there are varying maturity dates of the bonds purchased by the Fed to enable this process to keep on into the future


http://kingworldnews.com/kingworldnews/ ... kards.html

[AdamA]

To me, speculating about QE and its effects is almost like debating whether or not a tree that falls in the woods when no one is around makes any noise.  We'll probably never really know...I'll bet that it will be difficult to determine, even in retrospect 20 or 30 years from now.

[MediumTex]

To me, speculating about QE and its effects is almost like debating whether or not a tree that falls in the woods when no one is around makes any noise.  We'll probably never really know...I'll bet that it will be difficult to determine, even in retrospect 20 or 30 years from now.

Harry Browne talked about this topic a little when he said that since he didn't have time to explore all of the ideas in all of human history, the filters he woud use would be both truth and relevancy--i.e., he wanted you to show him not just that something was true, but that it had some relevancy to his life.  He said this helped keep him out of a lot of pointless discussions about things the truth of which was of no relevance to his own situation.

[murphy_p_t]

"Read what others think with an open mind, but don't tinker with the PP because of the things you read."

indeed. but i'm very happy to have a VP w/ mining shares & bullion!  ;D    (after carefully considering arguments of people who seem to know what they're talking about)


maybe this tread belongs in the VP section?

[murphy_p_t]

KevD,

just reread your post...you explained it better than me!

p

[smurff]

What happens when QE2 ends?
Answer:  You then get to cruise on the Queen Mary! 

[MediumTex]

maybe this tread belongs in the VP section?

So do Medium Tex's market prognostication posts!

No offense, Medium Tex, you are the glue that holds this board together, but what's the deal with all the "The S&P 500 Has Peaked for 2011" or "The 30 Year Yield Has Hit Its 2011 High" posts?!  I admit I haven't even opened the first thread.  It seems too Prechter-like. 

(Not trying to start anything here, just curious why all the posts that seem contrary to the PP philosophy.)

It's just my best guess.

In the case of the prediction that LT rates will not rise from their current levels, I wanted to offer a well-reasoned case for falling rates when we are so inundated with arguments for why rates are going to rise.

In the case of the stock market prediction, it will probably be an example of excellent arguments having little predictive value of what will actually happen.

[moda0306]

There is a difference between making certain market predictions based on what you're observing, but maintaining a diversified portfolio regardless, and writing articles telling people that certain things are "bound" to happen and they should invest accordingly.

[AdamA]

but i'm very happy to have a VP w/ mining shares & bullion!  

Why?

[murphy_p_t]

well...many of my positions are double & triple from a year ago. for instance, silver bullion. i was riding the 10 year bull market in gold bullion long before getting into the PP.

[AdamA]

well...many of my positions are double & triple from a year ago.

So what's the endpoint?  When do you take profits?

[moda0306]

KevD,

I think it maybe is a bit flashy, and MT is most likely just having a bit of fun.  He's made it clear he's not confident enough in his own predictive abilities to make them have ANY impact on his portfolio.  It's fun to do things like this, IMO.  For instance, I tell my friends I think LT's will be below 3.5% in 10 years.  It's solid numbers that draw a tighter picture than "rates will wobble but lower slightly."

I think for the 99% of postings on this forum saying how unknowable the markets truly are, it's ok to have a bit of fun and make some predictions on your least/most favorite PP asset.  I really think it would be odd if someone stumbled accross this site, picked out these few predictive posts, and ignored all the extremely useful banter and discussion here and went out and plopped his entire life savings into TLT.  I know that's not really what you're saying will happen but I see these predictions as harmless, fun punctuations to some extremely useful discussions.

In fact I wouldn't be surprised if MT's semantics around the price of stocks and interest rates are almost a mocking of the financial media being so blatant and sure about every prediction they make, "Gold WILL hit this, or stocks WILL do that if they hit this."  It's a form of speech used in sports/financial media and I think MT was playing off that a bit.

[MediumTex]

I actually think making predictions is only fun if you don't have any skin in the game.

Once you have money riding on a bet, you start sweating.  When this tension starts kicking in, it becomes very difficult to think clearly about your original prediction and whether anything has happened to invalidate any of your initial analysis.

I think that there is a lot of value in discussing the dynamics of predictions, not just whether a given prediction is right or wrong, but the whole cluster of thoughts and feelings that make us want to make predictions in the first place, and when they don't turn out as planned, what makes us want to cling to a vision of the future that may be diverging more and more from reality.

[moda0306]

I could care less about college basketball... literally have no interest in it... until a couple years ago when I put $5 into a bracket.  $5!

The next few weeks I was one of the lemmings constantly watching basketball, rooting on the edge of my seat.

I will never put money into a basketball bracket again.  It wasn't that I was "stressed" about it but I truly wanted to win, badly.  It took time away from things I actually enjoy doing, and during my busy tax season no less.  It didn't help that I actually picked a pretty good bracket and almost won (complete luck, trust me).

[AdamA]

I think that there is a lot of value in discussing the dynamics of predictions, not just whether a given prediction is right or wrong, but the whole cluster of thoughts and feelings that make us want to make predictions in the first place, and when they don't turn out as planned, what makes us want to cling to a vision of the future that may be diverging more and more from reality.

Discussing predictions is highly educational.  Beyond the economic/investment debating that goes on, it inevitably leads to some of the best political discussion I've heard. 

[moda0306]

I think that there is a lot of value in discussing the dynamics of predictions, not just whether a given prediction is right or wrong, but the whole cluster of thoughts and feelings that make us want to make predictions in the first place, and when they don't turn out as planned, what makes us want to cling to a vision of the future that may be diverging more and more from reality.

Discussing predictions is highly educational.  Beyond the economic/investment debating that goes on, it inevitably leads to some of the best political discussion I've heard. 

Yes... MT's detailing of why he thinks LT bonds are the best PP asset right now, and the resulting debates, are extremely informative.

[murphy_p_t]

well...many of my positions are double & triple from a year ago.

So what's the endpoint?  When do you take profits?

i've taken some money off table on uranium mining & rare earths. (and doubled down recently on the uraniums)

thought about doing same w/ silver, with hopes of a correction...the problem is, however, that exiting a position in a super major bull market is generally a mistake, in my view...even though silver is massively overbought at present...with gold, i will not sell any for many years...i will view outsized gains in gold as part of the VP...i know, heresy for PP'ers...but its a 10 year bull market

[murphy_p_t]

& certainly won't sell gold while the bernank is still @ the fed

[MediumTex]

Good stuff KevD.  Thanks.

But did I read correctly that you haven't actually looked at any part of the prediction threads? 

You should check them out.  I don't think it is going to lure you into any bad decisions.  You might even like them.  If you would like to debate my argument for the stock market rally stopping here, by all means do so.  We can only come out of that process wiser (since I have no emotional attachment to the positions I have taken).

The truth is I may be dead wrong on my stock market prediction, and if I am I will be no poorer because of it.  That's what makes it fun (it also helps me understand my own cognitive blind spots better).  For those who like reading my posts, seeing me put together a good analysis that nevertheless leads to a bad prediction should strengthen the case for the PP.

To all you PP-aroos at home, though, do not take any MediumTex predictions seriously, and DO NOT act on any of them if you are contemplating a PP for yourself.  The prediction are purely for entertainment, and the lessons embedded in them (if there are any) is that predictions rarely turn out as planned, and when they do it is normally more luck than skill.

The fact that I don't personally act on any of my predictions should also be remembered.

The boldness of my prediction thread titles was mostly intended to be ironic.  I may have missed the mark on that one.

[moda0306]

I picked up on the irony, MT.  Of course that was after I lost a fortune on a 10x Long-term treasury leveraged fund.

[Wonk]

So what's the endpoint?  When do you take profits?

Great question.  I've been in a similar position to murphy_p_t for a few years.  I began as a financial newb with a traditional portfolio and found the PP.  During the sale of a business and subsequent windfall, I dedicated literally thousands of hours of research to financial education which led a migration to a VP-heavy portfolio.  I'm relatively young and comfortable with a worst-case scenario.  About 80% of my total portfolio is composed of roughly equal amounts of gold/silver/mining stocks.  The remaining 20% is a combination of a traditional PP and extra cash.

Anyone heavily weighted in precious metals needs to have a pretty clear exit strategy.  I have a set of metrics and a timetable I follow.  If/when we get close, I'll start to scale out to a mostly traditional PP mix.  Investors who decide to get out on "gut feeling" will have a much higher chance of getting burned.  Precious metals are emotional markets.  The peak of a gold bull market will feel like the world is coming to an end.  Selling out of precious metals near a peak will feel like the worst decision, but in hindsight should prove to be the best decision.

I think it's a bad idea for most people who don't perform the due diligence to pursue such a strategy.  The traditional PP is a much better option.  In the end, my fate will most likely be one of either excellent foresight or blinding hubris.  Either way, I'll be fine with the outcome as I feel the reward is worth the risk.