Gyroscopic Investing

Can someone explain to me why QE has a positive effect on the stock market?

From my understanding, it is only an asset swap that pumps up banks reserves. If lending remains tight then it shouldn't have any effect on money supply. The other effect that it has is to keep interest rates low, but wouldn't they already be low in a slow growth environment absent the Fed? Im just confused about what it is supposed to accomplish...

Also, another thing Im a bit shaky on is whether the Fed is purchasing bonds directly from government or through primary dealers. If it is through primary dealers, then where are they getting the money from to purchase this new government debt? In other words, where is the money coming from to fund the governments 1.5 trillion dollar deficits?


Comments, article, or video explaining this would be helpful! Thanks

My sense is that by driving down interest rates, the Fed was attempting to make less risky assets like bonds and cash look unattractive, thus pushing people toward stocks and real estate (and gold, it turns out).

I think that it's mostly psychological (but isn't everything?).

Pointedstick wrote: My sense is that by driving down interest rates, the Fed was attempting to make less risky assets like bonds and cash look unattractive, thus pushing people toward stocks and real estate (and gold, it turns out).

Wouldn't low interest rates happen on their own as we are in a massive deleveraging process? Heck, after the credit and debt bubble that just popped we should have full on deflation and possible negative nominal rates. What I dont understand is how the Fed is preventing deflation through QE? What does QE do other than pump up bank reserves (that they dont lend)...and provide a ceiling on interest rates?

Pointedstick wrote: My sense is that by driving down interest rates, the Fed was attempting to make less risky assets like bonds and cash look unattractive, thus pushing people toward stocks and real estate (and gold, it turns out).

I guess the gold run up was mostly related to the fear of QE-induced hyperinflation. In that sense it was doing its job within the portfolio.

iwealth wrote:

Pointedstick wrote: My sense is that by driving down interest rates, the Fed was attempting to make less risky assets like bonds and cash look unattractive, thus pushing people toward stocks and real estate (and gold, it turns out).

I guess the gold run up was mostly related to the fear of QE-induced hyperinflation. In that sense it was doing its job within the portfolio.

Plus negative real interest rates.

doodle wrote: Can someone explain to me why QE has a positive effect on the stock market?

From my understanding, it is only an asset swap that pumps up banks reserves. If lending remains tight then it shouldn't have any effect on money supply. The other effect that it has is to keep interest rates low, but wouldn't they already be low in a slow growth environment absent the Fed? Im just confused about what it is supposed to accomplish...

Also, another thing Im a bit shaky on is whether the Fed is purchasing bonds directly from government or through primary dealers. If it is through primary dealers, then where are they getting the money from to purchase this new government debt? In other words, where is the money coming from to fund the governments 1.5 trillion dollar deficits?


Comments, article, or video explaining this would be helpful! Thanks

The Fed is effectively buying almost all of the new issuance of Treasury bonds with freshly created "money". It should be obvious that this is keeping interest rates much lower than they would otherwise be, as a large addition to the demand for bonds drives their prices up and yields down.

This has three major effects:
1. The federal government can run whatever deficits it wants with no concern for interest rates.
2. Savers can get almost no return on their money by buying bonds, so they are forced into risky investments to try to stay afloat.
3. The freshly created money is building up tremendous inflationary pressure.

At some point, either the economy will totally collapse (deflationary depression) or the new money will explode into the economy, causing a hyperinflationary depression.

Harry Browne wrote about these possibilities many years ago, and I don't know of any valid refutation of his analysis.

Libertarian666 wrote:

doodle wrote: Can someone explain to me why QE has a positive effect on the stock market?

From my understanding, it is only an asset swap that pumps up banks reserves. If lending remains tight then it shouldn't have any effect on money supply. The other effect that it has is to keep interest rates low, but wouldn't they already be low in a slow growth environment absent the Fed? Im just confused about what it is supposed to accomplish...

Also, another thing Im a bit shaky on is whether the Fed is purchasing bonds directly from government or through primary dealers. If it is through primary dealers, then where are they getting the money from to purchase this new government debt? In other words, where is the money coming from to fund the governments 1.5 trillion dollar deficits?


Comments, article, or video explaining this would be helpful! Thanks

The Fed is effectively buying almost all of the new issuance of Treasury bonds with freshly created "money". It should be obvious that this is keeping interest rates much lower than they would otherwise be, as a large addition to the demand for bonds drives their prices up and yields down.

This has three major effects:
1. The federal government can run whatever deficits it wants with no concern for interest rates.
2. Savers can get almost no return on their money by buying bonds, so they are forced into risky investments to try to stay afloat.
3. The freshly created money is building up tremendous inflationary pressure.

At some point, either the economy will totally collapse (deflationary depression) or the new money will explode into the economy, causing a hyperinflationary depression.

Harry Browne wrote about these possibilities many years ago, and I don't know of any valid refutation of his analysis.

Or everything could turn out just fine. There is a penchant for people (myself included) to always think that catastrophe awaits us.  :-)

Libertarian666 wrote:

doodle wrote: Can someone explain to me why QE has a positive effect on the stock market?

From my understanding, it is only an asset swap that pumps up banks reserves. If lending remains tight then it shouldn't have any effect on money supply. The other effect that it has is to keep interest rates low, but wouldn't they already be low in a slow growth environment absent the Fed? Im just confused about what it is supposed to accomplish...

Also, another thing Im a bit shaky on is whether the Fed is purchasing bonds directly from government or through primary dealers. If it is through primary dealers, then where are they getting the money from to purchase this new government debt? In other words, where is the money coming from to fund the governments 1.5 trillion dollar deficits?


Comments, article, or video explaining this would be helpful! Thanks

The Fed is effectively buying almost all of the new issuance of Treasury bonds with freshly created "money". It should be obvious that this is keeping interest rates much lower than they would otherwise be, as a large addition to the demand for bonds drives their prices up and yields down.

This has three major effects:
1. The federal government can run whatever deficits it wants with no concern for interest rates.
2. Savers can get almost no return on their money by buying bonds, so they are forced into risky investments to try to stay afloat.
3. The freshly created money is building up tremendous inflationary pressure.

At some point, either the economy will totally collapse (deflationary depression) or the new money will explode into the economy, causing a hyperinflationary depression.

Harry Browne wrote about these possibilities many years ago, and I don't know of any valid refutation of his analysis.

A few things here.

- Using a few indicators, rates are not unnaturally low.  Look at demand for new loans.  Look at inflation figures.  Look at how rates behave when QE is going on vs how QE is over.  Look at other countries with fiat currencies not engaging in similar "monetization."

- Savers have always had to take risk under the gold standard to earn a rate of return. Only since the government went fiat could people earn positive real yields on risk free assets.  We were spoiled from '81-2000 and today simply feels a bit sour in comparison.

- To state that there is "tremendous inflationary pressure" in our amazingly productive economy with people sporting awful balance sheets is asinine to me.

I've said it before but I'll sum it up this way:

In a country where the federal government issues a fiat currency, having that same entity collect taxes and issue bonds simply acts as a value-creating mechanism, and interest-rate floor-setting mechanism, respectively.  Looking at QE as a helicopter drop is a very, very flawed way of looking at it.  Treasury bonds are practically money.

In fact, to that last point, I wish they'd just make t-bills legal tender so we can quit looking at M0 charts and loosing our collective shit. It would already be included.

moda0306 wrote:

Libertarian666 wrote:

doodle wrote: Can someone explain to me why QE has a positive effect on the stock market?

From my understanding, it is only an asset swap that pumps up banks reserves. If lending remains tight then it shouldn't have any effect on money supply. The other effect that it has is to keep interest rates low, but wouldn't they already be low in a slow growth environment absent the Fed? Im just confused about what it is supposed to accomplish...

Also, another thing Im a bit shaky on is whether the Fed is purchasing bonds directly from government or through primary dealers. If it is through primary dealers, then where are they getting the money from to purchase this new government debt? In other words, where is the money coming from to fund the governments 1.5 trillion dollar deficits?


Comments, article, or video explaining this would be helpful! Thanks

The Fed is effectively buying almost all of the new issuance of Treasury bonds with freshly created "money". It should be obvious that this is keeping interest rates much lower than they would otherwise be, as a large addition to the demand for bonds drives their prices up and yields down.

This has three major effects:
1. The federal government can run whatever deficits it wants with no concern for interest rates.
2. Savers can get almost no return on their money by buying bonds, so they are forced into risky investments to try to stay afloat.
3. The freshly created money is building up tremendous inflationary pressure.

At some point, either the economy will totally collapse (deflationary depression) or the new money will explode into the economy, causing a hyperinflationary depression.

Harry Browne wrote about these possibilities many years ago, and I don't know of any valid refutation of his analysis.

A few things here.

- Using a few indicators, rates are not unnaturally low.  Look at demand for new loans.  Look at inflation figures.  Look at how rates behave when QE is going on vs how QE is over.  Look at other countries with fiat currencies not engaging in similar "monetization."

- Savers have always had to take risk under the gold standard to earn a rate of return. Only since the government went fiat could people earn positive real yields on risk free assets.  We were spoiled from '81-2000 and today simply feels a bit sour in comparison.

- To state that there is "tremendous inflationary pressure" in our amazingly productive economy with people sporting awful balance sheets is asinine to me.

I've said it before but I'll sum it up this way:

In a country where the federal government issues a fiat currency, having that same entity collect taxes and issue bonds simply acts as a value-creating mechanism, and interest-rate floor-setting mechanism, respectively.  Looking at QE as a helicopter drop is a very, very flawed way of looking at it.  Treasury bonds are practically money.

In fact, to that last point, I wish they'd just make t-bills legal tender so we can quit looking at M0 charts and loosing our collective shit. It would already be included.

Every other government (and corporation) has benefited from lower rates due to the desperate attempt of savers to get some return on their money when they can't get that on T bonds.

And as for the statement that savers couldn't expect a return without taking risk during the gold standard, that is true. But they could avoid inflation risk (for the most part, anyway) without taking market risk, which is no longer possible under fiat currency regimes.

Finally, if T bonds are "practically money", meaning that the Fed's actions don't increase the money supply, then does that mean the government can run any deficits it likes without causing inflation or any other monetary disruption? Hallelujah, Paradise is here!

Too bad HB isn't around to explain these matters better than I can. I'm sure he would be amused at some of the odd ideas floating around on a forum dedicated to his investing wisdom!

Libertarian666,

Just like pre-fiat money, we can hold gold.  What makes gold so volatile to the downside is the government's subsidizing of savers by giving them real risk-free return.  Hard assets are going to suffer in such an environment.

I don't know how many times MR proponents are going to have to repeat this, but we aren't saying there is no possible negative effect of deficits and/or excessive rate-reduction.  However, in a balance-sheet recession with deleveraging, inadequate demand, and low demand for loanable funds even at 0%, you're going to get very little traction from QE.

QE reduces the quantity of uber-safe interest-bearing assets in the economy. This lowers the floor interest rate within the US economy that any private lending will operate at.  That's all treasury bonds really are in the current environment... Interest rate floor setting tools. This has the ability to constrain private lending.

But replacing fiat govt-issued assets with other fiat govt-issued assets isn't inherently inflationary.  It's not a helicopter drop. It's more like replacing somebody's lighter fluid with lantern oil.  There's no reason to necessarily expect a huge fire where one wouldn't have existed before.

TennPaGa wrote: And no one is saying that government can run "any deficit it likes" with no consequences.

I don't understand this knee-jerk reaction to rational conversations about what the fed/treasury do.

We've said repeatedly that there are constraints to all this, but we're clearly not hitting the boundaries of them.

TennPaGa wrote:
If I have a T-bond, and the Fed buys it from me, how does that change the money supply?

Most would argue that the bond isn't money, but simply a loan of money to the government... what makes that a bit incomplete is pointing out that the government is the entity that creates the money, and therefore its participation in a borrowing market is a bit of a sham to begin with. 

I see safe financial assets, especially those loans to the very entity that creates the money in the first place, as "nearly money."  I just wish the government would end this argument today and make them legal tender and watch the market do nothing.  People don't hold their financial assets (stocks/bonds) because they're not legal tender, they hold them because they desire to save and take some risk to get a higher rate of return.  They could very easily be used as money if we so chose. 

So these M0, M1, M2 graphs are misleading.  Anything can be money if we accept it as such, but USD money is also an asset on our balance sheets that is used to settle most of or debts.  This means it's not just a medium of exchange of goods going forward but a tool to reform our balance sheets today.  We have to get our heads out of the sand on what money is, how debt works, and how entire economies work when they are monetized and have the ability to slip into Mexican Standoffs.