Chart of the Day: Don’t Think Like a Drug Addict

Every time the market takes a tumble these days everyone seems to blame the “taper” or QE.  I guess there’s always a need to apply a cause to every market gyration.  But I wanted to bring some perspective back to this conversation because I am afraid that some people are starting to think like junkies.  They act like drug addicts who think things can never be okay without another hit of this or that drug.  In other words, they can’t remember that the US stock market didn’t always have QE.  And in fact, it did pretty well before QE ever existed.

Before QE was implemented in 2008 the Dow Jones Industrial Average increased by 350X over the prior 112 years.  So let’s keep some perspective here.  I know these are unusual times, but that doesn’t mean the US economy is going to be addicted to Fed policy for the rest of eternity.  And in fact, if the long-term is any guide, we’re likely to do just okay without relying on QE like a drug all the time.  So let’s not think like drug addicts and focus excessively on the near-term here and what some people think is a stock market drug.



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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Suvy

    I think QE is more of a drug for emerging markets. Boy have they been getting killed.

  • fin

    This analysis seems pretty rush even though I do agree your point on QE. From statistic point, you data are skewed to the 2 data cluster but ignored the large range from 29 to 2010. If you lower your slope, then suddenly everything now will count on QE. You need to point out why you can draw a line with this specific slope. Thanks

  • Suvy

    I’ll add on to this point that a log scale should be used when looking at data this long.

  • SS

    He used a log scale which provides the right perspective. The point is, the stock market didn’t really really well before QE. And it can do really really well without it. The last 5 years aren’t a reflection of forever.

  • SS

    This is a log scale.

  • Cullen Roche

    Yes, this is a log scale.

  • Conventional Wisdumb

    Interesting chart. Wonder what it would like adjusted for inflation (and deflation for that matter) during that time period.

  • Suvy

    Yea, it is. I wasn’t paying attention.

  • Explorer

    Growing by 350x over 112 years represents growth of only 5.4% annual compounding.

    For total return add dividends.

    For the most important video you will ever see watch:

    It’s Albert Bartlett on compounding, growth and doubling, and it’s full of practical examples of how to evaluate the reality of compound growth estimates in real life.

    It has a very good examination of estimates of resource life in a compound growth scenario, and of resource usage compared to the past.

    8 parts, about 10 minutes each average, but well worth watching all of them.

  • Matt

    Perhaps without QE the jiggy jog in ’09 would have (should have?? – might still) looked like the pre-QE diggy dog of ’29.

  • AnonymousOne

    Let’s look at this through the prism of “behavioral finance”. If investors have been conditioned to QE, there just might be a bit of withdrawal. If the withdrawal gets really bad the Fed might give you a little to get right, but ultimately to get clean you have to stop. Much like rockstars the problem is investors are now addicted.

    We all just wanna be investment stars
    And live in the Hamptons driving fifteen cars
    The girls come easy and the QEs come cheap
    We’ll all stay skinny ’cause we just won’t eat
    And we’ll hang out in the Wall Street bars
    In the VIP with the banking stars
    Every Birinyi is gonna wind up there
    Every CNBC bunny with her bleached blond hair

    And we’ll hide out in the Eccles rooms
    With the latest dictionary and today’s who’s who
    They’ll get you anything with that evil smile
    Everybody’s got Ben Bernanke on speed dial, well

    Hey hey I wanna be an investment rockstar
    Hey hey I wanna be a rockstar

  • KB

    Cullen, I have a vague feeling that a line you draw through the graph is, to put it mildly, without much merit (meaning).

    Could you please explain two things:
    – why did you choose this specific time interval?
    – how exactly did you produce this line? Is it a regression? If it is, what assumptions did you use? If it is not, what it is? You just drew it like you wished?

  • http://pragcap Michael Schofield

    I don’t think that QE is important to the markets. Probably more of a trading opportunity. They’ll trade it ’til it guits working.

  • Benjamin Cole

    Actually, the experience with Japan and their QE in 2001-6 suggests that QE probably needs to be sustained for a long time.

    Japan had an expansion in those QE years–as noted by economist John Taylor, who recommended QE to Japan—but when they quit QE, they went right back to deflation- and perma-gloom.

    If you look at secular trends, such as interest rates and inflation since the 1980s in Western economies, you see where the Western economies have been headed: In contrast to the inflation-hysterics, we have been long-term trending towards zero inflation and ZLB!

    So, maybe this time is different. Unless central banks become growth-oriented, we are likely to have Japanitis, all the time and globally. Euope has has Japaniits.

    Only China, with a non-independent central bank (the PBoC, run by commies, ironically) appears to be able to sidestep this misery, as their central bankers have a command to fund growth.

    Probably QE needs to ramped up a bit, and maintained for several more years.

    I like prosperity.

  • Tom Brown

    Benjamin, I thought the MM position was that QE could be much more effective (and thus much smaller) if it was accompanied by a CB being very explicit about using it to accomplish NGDPLT. So assume that’s what the CB did: do you still think that QE would still need to be ramped up or sustained for a long time?

  • Cullen Roche

    Is the Nikkei rally a QE story? Or is it a currency story?

    QE via FX targeting works until it doesn’t….

  • JWG

    The Fed’s website, in a Q/A on QE, makes it clear the the Fed believes that QE has had a big positive impact on asset prices. Having publicly taken that position, then the Fed must believe that tapering and termination of QE will have a big negative impact on asset prices–right? If the investment world believes what the Fed says, why should anyone be surprised?

  • Cullen Roche

    I just drew an arrow from the bottom left to the top right. Fancy stuff, maths and all that, you know? :-)

  • Benjamin Cole

    Tom Brown and Cullen:

    Tom you are right, and QE should be married to an explicit and transparent Fed that targets NGDP.

    This is also good governance, btw. I believe in transparent and accountable institutions, and central banks have gotten away with mystique now for a couple generations.

    That said, I think forward guidance helps, but real money helps more. People who sell bonds to the Fed are largely banking the money (as Cullen points out) but they are also spending and investing more.

    In anything, the Fed needs to ramp up to get past the people just banking the money and get money more to people who will spend or invest, bypassing the banks.

    Cullen: Well, QE plays a role in the exchange rate, obviously.

    I agree with many that too much money is getting left in the banks, and in my fantasy world we run national lotteries and simply print money and give it to the winners, and winners outnumber losers in aggregate (usually small winners, as in you bet $50 and win $120).

    There would be limits on single payouts and annual winnings, and other mechanisms to make sure middle-class and lower-class people get the money, not because they are wonderful people but because they will spend the loot.

    But without that fantasy, I say just keep ramping up on QE until people start spending the money they have in banks, or banks start to lend more of it out.

    Lowering IOER is another interesting idea.

  • Stephen

    Nice line .Pity I can’t seem to find many people with a line longer than a year or so. QE has had and continues to have distorted or shaped behaviour rather unnaturally and it’s the process of unwinding that that makes the shorter line potentially hurtful.

  • Tom Brown

    Benjamin, you’re not an orthodox Sumnerite are you? :D

    I’m not saying you ever claimed to be one, but I can’t imagine he’d agree with much of what you wrote there past the 2nd paragraph: about lending, lotteries, banking and getting the money to “people that will invest.” Let me do my impression of a Sumnerian quick response: banks don’t matter, HPE on the MOA is what it’s all about (not “credit” & lending), monetary trumps fiscal, Cantillion effects don’t exist (or matter), inequality doesn’t matter.

    Especially the bit you wrote about the lotteries: that’s pure fiscal policy: a helicopter drop, right? That’s very different than a central bank paying the market price for Tsy bonds.

    I’m not criticizing you, it’s just that I’m a little surprised…. although now that I think about it, I believe I’ve seen you make similar suggestions in the past.

    He would agree with your 1st statements about the CB having a transparent policy of course…. and the last bit about lowering IOR.

  • Benjamin Cole

    Tom Brown-

    Not sure if the Fed printing money and giving it away is fiscal policy. I am not talking about borrowing the money–I am talking about money creation.

    Yes, it is crazy talk, politically speaking. Would it work? I think so.

    Scott Sumner is a real economist (I am just a gadfly), and you are right he likes the HPE.

    My first concern is getting to boom times; inequality can be handled later. I like consumption taxes—build a huge mansion and buy big cars and yachts and you pay taxes.

    I agree with Sumner that monetary trumps fiscal—traditional fiscal, where you borrow money to spend.

    Not sure monetary policy would trump my lottery idea though.

    I am open to the idea of heavy QE in combination with heavy spending on infrastructure (I leave it to you to prevent boondoggles).

    What I am against is a central bank piously pettifogging about inflation when we are near ZLB and deflation, and inflation has not been a problem in 30 years.

    Our central bank is fighting the last war. But then, what would one expect from an independent public agency? Where staffers have sinecures and

  • KB

    )))) Then, it is what it is! A line from the bottom left to the top right. Why not to the bottom right? Or not to the middle?….

    If you promise to publish my research, I, in turn, would promise to do an extensive study of how Pokémons of different shape would fit in the graph of DJIA. Then, based on Pokémon nomenclature, I will predict the effects of QE, and future movements of the index. I also promise not to use any math.

  • Suvy


  • Suvy

    To be fair, the Yen has been moving like this ever since they started QE. The thing jumps up 3% in a couple of days and they falls back 5% the next week and then jumps up 4% and it’s been moving absolutely insanely. Personally, I expect more FX volatility for a country like Japan.

  • Tom Brown

    I’ve always enjoy your comments Benjamin. I think you once remarked that you wish counterfeiters would get busy and start cranking out some dollars… or something to that effect. Plus, you know some good words like “pettifogging.” :D

    Vincent Cate needs to have an unabashed inflationist such as yourself carpet bomb his site once in a while.

    Regarding Fed giving money away as fiscal policy: I’m pretty sure that counts. David Beckworth once proposed that as a “helicopter drop” fiscal backup mechanism when monetary runs out of steam. Either that or a “Helicopter Drop.” (Sumner makes some sort of strange distinctions between the capitalized version and the uncapitalized… one can be mistaked for normal QE I think). But Sumner is against it. I’m pretty sure that Beckworth brought it up more than once. Here’s the results of a search on Dave’s site:

    I think Cullen agrees that the Fed overpaying for stuff is fiscal policy. Helicopter drops mean the Fed is overpaying for nothingness. Cullen has used the analogy of the Fed buying bags of dirt. Although I think QE1 would qualify too to some extent (since you could argue the Fed overpaid). Mike Sproul has also discussed this idea, but is not really in favor of it (but being a backing theorist, it’s clear to him how this directly devalues the currency).

    That’s my take! I could be wrong, but that’s how I understand it.

  • Cullen Roche

    Ha. I am the first one to tell you that this is a very general perspective. After all, no one has a 150 year investing time horizon to begin with!

  • Edmund
  • Edmund

    Check it out: FRED doesn’t even allow you to use a log scale once you’ve adjusted for inflation. It basically says, “Don’t do that – that’s dumb.”

    Actually, this is what it spits out: “Line 1 has been skipped. Either uncheck the “Left” log scale option in the “Graph” section or set the line 1 formula to “a”, the default. This combination of features has been disabled to prevent incorrect data from being displayed.”

  • Suvy

    Edmund is right. Using a log scale basically strips out inflation because inflation compounds every year, so if you didn’t use a log scale, the chart would look exponential and basically be useless. A log chart turns that compounding and makes it into a linear function.


  • Edmund

    “After all, no one has a 150 year investing time horizon to begin with!”

    And when you think about it, this is a huge problem. :(

  • Benjamin Cole

    I also enjoy your comments Tom Brown.
    I say “no” to helicopter drops. Rather, send in the B-52s.

  • Boy Plunger

    Isn’t QE simply another word for debasing the currency? Haven’t kings been doing this since the beginning of time? How come they used to call this game speculation before the cabal that is the Fed came along?

  • Edmund

    No – no, no, no. Swapping Treasurys or MBS for reserves is not the debasement of a currency.

  • Boy Plunger

    Isn’t the NSA recording everything? At what point is there Rage Against the Machine? When do the jails open for white collar criminals?

  • Tom Brown

    If each dollar liability issued by the Fed is backed by a dollar of assets held by the Fed, then the dollars issued are not in any way debased, especially when it’s possible to eventually reverse this exchange. And that in fact is the case: each dollar issued is used directly to purchase a dollar of Tsy debt held at the Fed as an asset. It’s analogous to the situation that would result if the Fed were to issue dollar denominated liabilities to purchase some other kind of asset (gold, silver, etc) at market prices. Here’s a bit more explanation of that view of it:

    I think that’s a decent argument against the “debasement” claim.

  • Edmund

    I’m not sure what any of that means.

    On a related note, if you crunch the numbers, it becomes clear that the NSA is not recording everything. Maybe they would if they could, but there’s no way they have the storage capacity to keep even, say, a week’s worth of internet traffic. Nor would they have the capacity to parse it if they could store it.

  • Boy Plunger

    You must be one of the headless chickens on Wall St. Google Big Data, Google Hadoop, Google Edward Snowden

  • Tom Brown


  • Andrew P

    That graph is very interesting. It shows the stock market in a “normal” trading range until about 1996. Then it changes regime to the present era as the dot-com bubble took off and the market more than doubled. It gets me thinking that there are only 2 ways the market can mean revert back to the former pattern. One would be a large deflationary decline in stocks. The other would be for CPI inflation to dramatically outpace the market for a while. It all goes back to the question of how will the present era end – inflation or deflation?

  • Andrew P

    China? China hasn’t done QE. The PBOC controls credit more directly and they have pumped in phenomenal amounts of it in the last 5 years. It is only now they are running into diminishing returns and default problems from all the malinvestment that was financed.

    It is easy to finance “growth” when your economy is underdeveloped. But hard resource limits prevent it from being done forever.

  • jayedcoins

    Have you written anything about your take on the social impacts of a lottery-style monetary stimulus? That would be my biggest concern and I’d love to read your thoughts on that. It seems like a smart monetary policy, but, at best, nearly unworkable politically.

  • jayedcoins

    It’s not a binary decision.

    On a given night when my wife and I have sex, it generally has a big positive impact on my happiness. On a different night when my wife and I do not have sex, it generally has no impact on my happiness — I am as happy as I was an hour earlier, or two hours early, or when I woke up in the morning.

    The environment in which QE was operating in 2008 is different than the one in which it is operating today.