Sep

23

To what extent will the expansion of the Fed's balance sheet, the QE3 and presumably more when this one doesn't work cascade around and lift other markets. Will the markets that have gone up the most so far like the grains and metals go up more than those markets that are relatively stagnant? How could this be profited from?

Rocky Humbert writes:

As one of the early believers in the market-moving potential of QE1, I suspect that my response to this inquiry may be surprising to some: I think that the idea that this qe3 and more will cascade and lift markets from here is presumptuous — and quite likely wrong. I posit with only a slight bit of quantitative evidence that we are approaching the point of diminishing marginal returns for QE. This is primarily because the move from 0 to 1Trillion was an infinite growth in the Fed's balance sheet. But the move from 3Trillion to 3.5Trillion is only a 16% increase. In other words, the Fed would need to engage in exponentially increasing amounts of QE to achieve the same effects. Additionally, the institutional memory of the market has now accepted the Chair's perception as conventional wisdom, so I think the half-life of QE effects are much shorter than previously. Lastly, I note that corn peaked on August 21st (the Fed largely telegraphed QE3 and announced it on September 13) and it has declined 11% since then. Oil peaked (so far) on 9/14 (the day after the fed announcement) and has declined about 8% since then. The Chair and I disagree on the underlying proposition. Hence, all is right with the world.


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