Ben: It’s QE Low, Sell High, Not QE High, Sell Low!

I wrote about this briefly a few weeks ago, but given that one of the main components of Ben Bernanke’s QE success revolves around the “wealth effect” of rising asset prices, one has to wonder if Dr. Bernanke hasn’t fallen victim to a classic investing axiom.

When Bernanke implemented QE1 the markets were in a death spiral.  The government’s actions played a huge role in stabilizing prices.  Sort of like the recent ECB intervention in European periphery bond markets.  The government comes in and makes a market with their printing press and confidence returns as investors realize that you don’t bid against the guy with a printing press.  So, QE1 “worked” in that it had a hugely stabilizing effect.  QE2 was a bit different, but one could argue that it also had some stabilizing effect since markets had fallen substantially prior to the policy’s implementation.  The subsequent market rallies gave the appearance that the Fed had saved the day.

So, I think we’re at a very interesting point in the history of monetary policy.  Instead of implementing QE low (following the old buy low, sell high mantra) Bernanke implemented QE after a huge “wealth effect” had already occurred.  He wasn’t buying into a market decline like QE1 and QE2.  He was essentially buying after the rumor had leaked.  So the interesting thing here is, will the market “sell the fact”?   And will we look back at QE3 and say it was a failure or a success because of Dr. Bernanke’s failure to adhere to the most basic investment principle in the world – buy low, sell high?  I don’t know.  I have tended to think QE is far weaker than most presume, but given that it’s one strong point has tended to revolve around its influence on stock prices, this version of QE could play out more interestingly than the last few events….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Greg Merrill

    Hrmm. I wrote something vaguely similar a few days ago.

    IF you are correct and Mr. Bernanke has ‘bought high’ and the market falls relatively soon how much psychological damage would this do to the Bernanke put?

  • GreenAB

    Ben & the gang with a 50 point drop are panicking already and are back to the late day rumor leaking game.

    “Fed considers upping QE3 size and language”
    story see:

  • LVG
  • Boston Larry

    @GreenAB, then perhaps Ben’s leaked rumor was the reason for today’s late day rally after a swoon earlier in the session? Now with the Fed meeting ending Wednesday, will the Fed up the ante and increase the monthly amounts of bond buying? If the Fed makes no change on Wednesday, then we may see an equity sell-off.

  • Cullen Roche

    That’s what I heard. Doubling down on QE or some nonsense like that….

  • Andrew P

    Japan has been doing QE for 20+ years. Their stock market has drifted substantially lower during that time, with some sharp multiyear rallies along the way. I think QE just stretches out the timeline of the market action. It allows the value of assets and savings to be preserved for current pensioners, but does nothing at all to grow the real economy. But if your population is shrinking and the whole point is to live off your assets until most of you are in the grave, QE makes sense.

  • Andrew P

    Sounds like Benny is getting desperate.

  • anon

    This is a “save my career” mantra. Market will be “supported” into the Presidential election (remember the chart that shows tight correlation between spx and Obama’s re-elected odds?). Ben continues to raise expectations even after a QE infinity declaration and spx hit new high. Like how most things are conveniently out of sync (including failure to seasonally adjust one state’s job data?)

  • Andrew P

    There are persistent stories that a lot of crap in the Eurozone is being held back until the US election is over as well. And I got a feeling that if the unexpected happens (a Romney victory), the markets are going to lay a rotten egg.

  • KevinM

    “a lot of crap in the Eurozone is being held back until the US election”

    To what end? Do either the Greeks or the Germans have a stake in which man wins? I lived in Massachusetts during the applicable time, so I’ve “seen Romney”, and I don’t know how they would guage the effect of his innauguration on US policy toward Europe. The differences between the two candidates appear to be social policies not related to Europe.

  • jonnySingapore

    except the sabre rattling in the middle east that Romney and Ryan seem hell bent upon.

  • Gary_UK

    One day people will look back and realise that QE had nothing to do with ‘the economy’, or a ‘wealth effect’ but was just providing fresh base money to the banks so they can continue to bid for USTs and keep the USG’s $1trillion deficit funded. Base money to replace dying credit money. Created from thin air! Magic!!

    It’s really pissing off central bankers the world over, so expect a spiral downward for the USD, as more and more countries bypass it in direct currency agreement.

    Your days are numbered (in the 1000-1500 range).