Bob Doll of BlackRock is singing his usual bullish tune in his latest commentary. This time, his intention is to calm fears regarding the much hyped end of QE2. He says the end of the program will be a “non-event”:
“Weaker growth levels appear to have brought about some selling pressure in risk assets as investors seem to be preparing for tighter monetary policies and the end of the US Federal Reserve’s QE2 bond-purchase program. The impact of the pending end of the QE2 program is among the most talked about topics among investors. Despite the widespread concern that the end of the Fed’s program could derail the recovery and send markets into a significant correction, we think the impact will be minimal. There are significant differences between conditions today and when the Fed ended its first round of quantitative easing in the summer of 2010. Lending standards have eased noticeably since that time and business and consumer loan markets have been growing. Additionally, in contrast to the time when QE1 came to an end and money growth was flat to negative, it is accelerating at present.
This backdrop, combined with a general environment of better and more self-sustaining economic growth suggests to us that the end of QE2 should essentially be a non-event.”
This is generally accurate in my opinion. It’s become fairly clear by this point that QE2 hasn’t done much for the economy if anything. Much of the debate regarding QE2 and its effects point to circumstantial evidence. The only direct link appears to be the speculative nature of QE2 and the general perception that it is good for all risk assets. In this regard, the effects are mixed at best as speculators have generated a supposed “wealth effect” in equities as well as a surge in many commodities. At its onset, I maintained that QE2 would be a monetary non-event. That was true in the monetary sense, but I vastly underestimated the extent to which the Fed would be able to impact psychology. In terms of its actual economic impact QE2 should have been a non-event, however, its impact on investor psychology has caused wider ranging effects. The most notable is the surge in speculative bets by market participants.
In theory, Doll should be right that QE2’s end is a non-event. After all, from a strictly monetary sense, the asset swap is a non-event. From a psychological perspective, however, it is anything but a non-event. As I’ve mentioned previously, the Fed has essentially helped investors step on the gas heading into a tight turn. Some markets (such as silver) appear to have already veered off the road. Others are remaining more buoyant. The psychological impact of QE2 has helped generate a nice air pocket in risk assets based in large part on margin debt. Should that margin debt trend reverse the end of QE2 will be seen as anything but a non-event. It will be seen as a contributing factor in what appears like growing economic instability.