QE 3 and the Stock Market

[Dave (imported)]

I don't know where the financial thread went. So I'm posting this new. I also don't play in the market.

If you go plot out the beginning and end of the first two Quantitative Easing from the Fed against the Dow Jones, you will see that the Stock Market rises during the weeks of easing.

I was watching CNBC the other day and one of the commentators pointed out this fact.

So as Bernanke teases and pushes and pimps QE#3 then the market should rise during that time just like it did before.

The easing of whatever the Fed eases during a QE gooses the Stock Market.

At least that's what they said.

[Hash (imported)]

I play the market, but I didn't start out that way. Playing the market is different than being invested. The current market system allows the big money market fund managers to manipulate the market and take out small players like myself. I've had limited success against these big boys who seem to get together and decide, "Well, the market is getting too expensive, so we'd better call for a correction!" So in unison they start selling off their winning assets and drive the market down until they can buy stocks at a discount, essentially killing the little investors who were trying to earn some money for retirement. The stock market is a federally sponsored ponzi scheme. It abounds with thieves and crooks, there once was a buy and hold philosophy, but those days are gone for the most part. Today you've got to have a "player" philosophy. Buy and sell quickly, don't hold anything long term or you'll get burned. It's a game or crap shoot, like playing the lottery.

[bobover3 (imported)]

The stock market is sensitive to the money supply. The more cash there is in the economy, the more cash can find its way into the market. Since "quantitative easing" is a way of pumping money into the economy, stocks will respond immediately. But understand - the increase in stock prices is not an increase in value; it's inflation. If you increase the money supply without a corresponding increase in GDP, then the economy absorbs the excess cash by increasing the price of all assets. Not only stock prices but all prices will rise. The Fed has sought to avoid a deflationary spiral (people worried about hard times spend less, so businesses make less and lay off workers, inflaming people's worries; since GDP goes down while the money supply stays the same, deflation results), so it acts openly to cause inflation, calling it "stimulus." Short-term traders love QE because it gooses prices, but it hurts the long-term prospects for the economy. The Fed knows this, but feels inflation is a lesser evil than deflation.

[Dave (imported)]

the question the CNBC reporter put to the panel was that since they could show the chart of stocks rising from being goosed by QE1 and QE2 was anyone jstifiec in not investing in the stock market to make some money?He literally put his hands in his pocket and asked if anyone thought it stupid to insist that QE#3 was bad on principle and then sit on the sidelines or were they going to make money on the rising stocks and invest... I thought it was a rather interesting position from what I've seen of the talking heads on CNBC.

[A-1 (imported)]

The stock market is sensitive to the money supply. The more cash there is in the economy, the more cash can find its way into the market. Since "quantitative easing" is a way of pumping money into the economy, stocks will respond immediately. But understand - the increase in stock prices is not an increase in value; it's inflation. If you increase the money supply without a corresponding increase in GDP, then the economy absorbs the excess cash by increasing the price of all assets. Not only stock prices but all prices will rise. The Fed has sought to avoid a deflationary spiral (people worried about hard times spend less, so businesses make less and lay off workers, inflaming people's worries; since GDP goes down while the money supply stays the same, deflation results), so it acts openly to cause inflation, calling it "stimulus." Short-term traders love QE because it gooses prices, but it hurts the long-term prospects for the economy. The Fed knows this, but feels inflation is a lesser evil than deflation.

Inflation reduces the impact of the national debt? Care to comment on this, Bob/3? We are all ears...

[bobover3 (imported)]

If Americans have more cash (regardless of how much it buys) and pay more in taxes, then that will help reduce the national debt if the government uses the added tax revenue for that purpose. If the government spends the money on other things, the result is inflation without debt reduction.

Foreign investors in US government debt are badly hurt by inflation, since it just reduces the value of the repayments and interest they receive. The danger is that persistent inflation will make US debt unattractive to foreign investors, who may demand higher interest to buy it. This contributes to an inflationary spiral - if the government tries to escape debt by planned inflation but winds up with higher interest costs and more debt, then it may try to borrow more to cover its mounting debts. This ends only when the government limits borrowing and inflation (austerity), or defaults.

The Fed is trying to walk on a razor's edge - deliberate inflation, but not too much. We may all hope they succeed, but no country ever has. Investors know that "this time things are different" is what people say just before a crash.

[Dave (imported)]

We haven't seen significant inflation in over a decade. nearly two decades if I'd research it and be certain.

I sometimes thinks that all the fears are overblown and that the FED sees inflation around every corner.

Do you know that if you are afraid of spiders, your brain tunes your eyes to "see" spiders everywhere as a defense mechanism. That's my attitude toward the FED and inflation.

[bobover3 (imported)]

We haven't had inflation because, until recently, the Fed has done a good job of managing monetary policy to avoid inflation. In fact, several recessions were caused by the Fed's over-aggressive attempts to forestall inflation. Now the Fed is deliberately stoking inflation because it sees a greater threat in a deflationary spiral. Let's hope they're right.

[moi621 (imported)]

We haven't had inflation because, until recently, the Fed has done a good job of managing monetary policy to avoid inflation. In fact, several recessions were caused by the Fed's over-aggressive attempts to forestall inflation. Now the Fed is deliberately stoking inflation because it sees a greater threat in a deflationary spiral. Let's hope they're right.

Then although currently priced, high.

This is still a good time to buy Gold and/or Silver ?

Inflation represented as more dollars to buy a ounce of this or that.

Moi

[bobover3 (imported)]

This is a good time to buy gold or silver. But, as I cautioned you in an e-mail, prices have up and down swings, despite the primary trend. Try to buy on a down swing.

If Romney wins, he might replace Bernanke when his term expires on January 31, 2014, so beware of policy changes. The market may be unstable until it knows the election results and what they mean.

Regardless of the Fed, a strong President might set the direction of fiscal policy, also affecting inflation. Obama has abdicated this role, and Congress just wants to buy votes, so they have effectively passed decision making authority to Bernanke. If Romney, presumably a stronger President than Obama, takes office, Bernanke's role might lessen.