Since there is clearly a great deal of confusion over my position on QE please allow me to reiterate. My position is that there is no fundamental reason for equities to sustain gains due to a quantitative easing program. That is not the same as saying that equities can’t move in the short-term. Equities move for any number of reasons in the short-term – many of which are entirely irrational. Ben Graham once described the stock market as follows:
“In the short run it’s a voting machine, but in the long run it’s a weighing machine.”
The votes are in and they are unanimous. Equity investors are voting that QE will do something for the economy. However, that does not mean it will do something for the economy. If QE somehow results in economic recovery down the line I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place). At that point, the market will have weighed the facts and conclude that Ben Bernanke was in fact correct to push for higher asset prices. So, then we have to ask ourselves – what if QE really works?
Aside from the operational facts regarding QE there are still incredible hazards regarding such a policy. If this indeed works (pushing up asset prices) then why don’t we just perpetually perform QE? Why don’t we just sustain asset prices “higher than they otherwise would be”? The very idea of this as an economic strategy is frightening in my opinion. If QE actually works then there is no need for fundamentals. Why does anyone get up in the morning and go to work? We can all just go out and open an ETrade account and let Ben pour money into our accounts. Unfortunately, that’s not the way economics works. You would have thought that we’d have learned this after two bubbles in less than ten years, but no. Here we are again. Some of this appears like common sense, but as Mark Twain once said: “common sense is not so common.” Personally, I wish it was this easy. I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe. Or would it?
Place your votes in the short-term. But don’t forget that you could get crushed by the weighing machine in the long-term.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.