Wednesday, April 10, 2013
effects of quantitative easing
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.