IBC Practitioner Briefing:End of QE3

Robert P. MurphyNovember 20, 2014

Recall Austrian business cycle theory:

Monetary inflation hitting the credit markets pushes down interest rates artificially, causing an UNSUSTAINABLE BOOM.

Normally the boom ends when central bank gets cold feet (from rising prices) and stops injecting new money. Interest rates spike, then crash.

However, even if central bank kept pumping, eventually the “crack-up boom” when currency collapses.

Playing Footsie With QE3

Fed originally postponed the “taper” in fall of 2013.

As of Oct. 15, S&P500 down 7% in 30 days. Bullard talked “pause” on Thursday, turnaround day, then Friday all indices up more than 1%.

Long-Term View S&P500

Will Yellen Be the Fall Guy (Gal)?

Paul Volcker took over in August 1979. Recession in January 1980. Then new recession officially began in July 1981, unemployment 9.7% in 1982

August 1987 Alan Greenspan took over; “Black Monday” occurred on October 19, 1987, when the Dow dropped 22.6%.

In February 2006 Ben Bernanke became Fed chair. Great Recession officially began December 2007.

Fed and Bank of Japan

Fed reaffirmed end of QE3 week before the mid-terms, but later that week Bank of Japan made surprise announcement of more “stimulus”: markets rallied.

Quick Facts About Japan:

The Nikkei 225 index is currently less than half what it was in 1990, even in nominal terms (though very low price inflation in Japan).

Japan has been experimenting with its QE for decades. In early 2006 BOJ sold off assets.

Japanese stocks kept rising, but by August 07 fallen back to early 2006 level.

They are now utterly dependent on BOJ expansion.

BE CAREFUL ABOUT WARNING CLIENTS OF “SPIKING INTEREST RATES” AND/OR

“DOLLAR COLLAPSE” IT’S NUANCED!

Following nuances show the strength and safety of IBC, but it would be a shame if clients erroneously concluded that a Practitioner had been wrong…

Treasury Yields, Select Dates 2008

COME TO THE THINK TANK 2015!