My readers fully understand how the bull market in stocks have been the result of ultra easy monetary policy. During the entirety of the bull market of the last 7 years we have had interest rates stuck at zero, and thus Fed interest rate policy has been a constant. The variable has been the other monetary experiments, the four QE programs and operation twist. I divide up QE3 into two distinct programs, the main QE period and the Taper period. Below is a chart, not only showing the bull market, but its drivers, and I'm not talking about healthy economic expansion.
While we all know that the QE programs have goosed the markets, it really takes a visual aid to see how correlated they actually are. QE 1 was a long program, 19 months, of about 60 billion a month, and had a big job to do. It had to reverse the very sharp down trend and get things headed north again. It was successful, but during the last months of QE1 and immediately following its conclusion, the market was essentially flat until they started jawboning QE2.
QE 2 was 85 billion a month, but lasted only seven months, and the markets again rolled over when it knew the end of the line was coming. Operation twist allowed markets to recover somewhat, but it wasn't until QE3 was more or less a given, before stocks really rebounded. QE3 was the largest program, but while twist was still ongoing it was not printing its peak of about 85 billion a month, and during this overlapping time the markets were flat. Once QE3 was at its full printing power the stock market makes its most impressive rise of the bull market. The taper introduced progressively lower injections of money and on cue the equity markets slowed their rise.
It is easy to see on the chart that, nearly to the day QE3 ended, the markets have started a flattening or even a slight down trend. What is the only thing that has stopped this type of trend since the financial crisis? The announcement of a yet another QE program of course. Well if the fed is to be believed, and I'm not saying that you should, not only are we not getting another QE program but they are going to add a new variable, rising interest rates. Raising interest rates this week is as clear a sell signal as you could ask for after looking at this chart. What is unclear is how long will it be until they start experimenting again, and that will likely depend on the trajectory of the downtrend.
The next intervention will likely take on a new shape, and not the, now conventional, QE. I lean toward a system of banning cash to allow negative rates such as the E Dollar, but only time will tell.
Does anyone else feel as if we were listening to the click click click of a rollercoaster during QE3 and the taper, the silence at the precipice since, and are about to take a wild ride? Hands up, and hold on.