Wednesday, April 10, 2013

effects of quantitative easing

Here are some charts which are telling the story of quantitative easing by the Bank of Japan and by the Fed, and the lack of same by the European Central Bank.

The bottom chart shows the Japanese Nikkei stock market index. Last November now-prime minister Abe promised during his election campaign to push the BOJ into an aggressive policy of quantitative easing so as to move the Japanese economy out of its deflationary slide of the past 20 years. A few days ago the BOJ announced a very aggressive policy of quantitative easing and you can see the resulting spurt in the Nikkei. All in all the Japanese stock market has risen more than 60% since it began to anticipate the BOJ new policy. I think the Japanese bull market has a lot further to go. I expect to see the Nikkei at 21000 over the coming months.

The other side of this coin is the associated slide in the yen. The second chart from the top is a monthly chart of the yen and right below it is a daily chart. I think the yen will drop to 96-98 and then put in a rally to 108. But after that rally I think the bear market in the yen will resume.

The effects of the Fed's policy of quantitative easing can be seen on the top chart, a daily chart of the S&P 500. Today this index has traded at an all-time high, a few points above its 2007 top. If the rally from the June 2012 low near 1260 matches the size of the initial rally of 345 points off of the 2011 low near 1075 this index will reach 1605 before a substantial drop starts. I still think this latest move up in the S&P is very close to its end - the index today has reached 1585. The first sign of a serious decline will be a drop to and below the 50 day moving average (green line) which has stopped the last two reactions in the S&P.

Sadly, the Europeans have not gotten the message about the importance of quantitative easing for assisting in debt restructuring. The Euro has become just like the gold standard of the 1930's for the EU with all the negative consequences of the gold standard seen during the world-wide great depression of the 1930's. The result is bad for European economies but bullish for the Euro currency because the ECB is pursuing a much tighter policy than the Fed of the Bank of Japan. This past week the Euro has climbed visibly above its 20 day moving average, the red line on the chart second from the bottom. I think this means that the Euro is headed for 1.40.

One last observation: the purpose and the eventual effects of the quantitative easing policies of the Fed and the BOJ will be to raise interest rates, not lower them. Low interest rates are generally associated with weak economies, poor economic growth and high levels of unemployment. Quantitative easing is intended to raise growth rates and lower unemployment levels by raising expectations about the level of future economic growth. If successful, the results of these policies will be higher interest rates, not lower ones.


Kelly Blaine said...

With all due respect Carl.

Quantitative Easing or Printing Money has never worked. Back in 1715 France was one of the first to try it....yeah, it worked for 4 years (we are now just past 4 years into this cycle), then things collapsed and it took a century to recover. Its a short sighted philosophy that has long, complicated and devastating consequences. Stanley Druckenmiller recently pounded the table publically this time (in 2006 he met with public officials and told them the RE bubble had devastating consequences and they shunned him) and said the current QE will result in far great market consequences than 2008 and they are coming sooner than later. If you do not know Stanley Druckenmiller, he was George Soros star portfolio manager.
I agree with you, the INDU and S&P has made its targets....Guess they are waiting for QQQ to make its at $73. I think we are very near highs that 2 to 3 generations will never see again.

Joe_in_Indiana said...

I agree with your statement Kelly.

The 1930's will be a picnic compared to the near future we have in store.

Sad to say-sad for us-sad for my daughter.