QE and the PP

[murphy_p_t]

My hypothesis is that the FED's actions are causing the run up in the stock market and keeping LTT where they are.

Any thoughts on what happens if / when QE is ever reduced / ended? Is it likely that stocks and bonds both tank simultaneously?

[RuralEngineer]

If there's no healthy economy to fall back on? It's hard to say. Tanking stocks might help drive demand for LTTs and push rates down. There might be a period of time where both went down but more likely we just get crap loads of volatility like we've had for years now.

I think QE would come back immediately in such a scenario.

This is my uneducated opinion.

[Ad Orientem]

There are a lot of ways this could play out. If we see a dramatic reversal by the FED it could be 1981 all over again. In that case it's Katy bar the door and bury the cash! If on the other hand we have a solid economic recovery underway and the FED takes the punch bowl away gradually we might just see a normal rise in both interest rates and inflation. Stocks and gold would probably hold up.

The only scenario in which I would be bullish on LTTs though, would be if we have another asset bubble explode without first getting an economic recovery. Then we could be in for a very scary ride on the express deflationary elevator heading to the interest rate basement. Next stop 30 yr LTTs at 1%.

[MediumTex]

I don't really know what the Fed is buying with the QE funds.

I think that the Fed has less control over things than people sometimes imagine (unless, of course, it does something STUPID like start raising interest rates in the middle of a recession).  More than anything, the Fed seems focused right now on trying to improve the psychology of the market and the perception of how the economy is doing.  If that has been its goal in recent years, I would say that Bernanke and the Fed have been quite successful.

As far as QE and the PP, I doubt that it has much effect on the bottom line.  Short of something like Volcker's early 1980s moves, I would just ignore it.

[GT]

What effect do you think the QE is having on the HBPP right now? Is the QE causing short term bonds (SHY) to have such a low return? I did a quick review of the years that gold had a loss and it seemed that Cash was always there with a steady return; except for 1994. Right now it appears Cash is not able to give the portfolio that return. Just wondering if this is QE driven. Not a numbers guy so jump in and let me know if I am mistaken.

https://web.archive.org/web/20160324133 ... l-returns/

Code: Select all

 	Stocks	Bonds	Cash	Gold	
					Total
1975	38.4	8.9	7.6	-27.6	6.8
1976	26.5	16.5	8.6	-4.5	11.8
1981	-3.9	1.6	18.6	-32.9	-4.1
1983	21.8	0.4	8.3	-16.6	3.5
1984	4.3	15.2	12.5	-19.5	3.1
1988	17.8	9.2	5.6	-15.6	4.2
1989	28.7	17.9	8.4	-3.2	12.9
1990	-6.2	5.8	8.6	-1.9	1.6
1991	34.4	17.4	10.4	-10.4	13
1992	9.6	7.4	6.5	-6.1	4.3
1994	-0.2	-7	-0.6	-2.6	-2.6
1996	21	-1.3	4.4	-5	4.8
1997	31	13.9	6.4	-21.7	7.4
1998	23.3	13.1	7.4	-1.2	10.6
2000	-10.6	19.7	8.8	-5.8	3

[craigr]

What we are experiencing now is much different than what happened in the past in terms of Fed action.

Yes, they are holding down interest rates on cash and bonds. As of now, that is smoking out investors to go into stocks and foreign assets chasing yield. I think the only correct answer as to what will happen when QE stops is "nobody knows." However I suspect with so many predictions out there, someone will be right and hailed as a pure genius for their financial acumen and ride it for the next 10 years. Be on the lookout for the newsletter advertisements.

But as to what we can do about it as investors? For the low interest it's pretty much grin and bear it. Otherwise you get into the yield chasing circus everyone else is pursuing and that historically has always ended badly. I think being widely diversified is the only real option. There are simply too many ways the whole thing could pan out both good or bad.

[Pointedstick]

GT, you might want to edit your post to put that table within 'code' tags so the columns line up.