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How Asset Prices React to Quantitative Easing

Sunday, September 30th, 2012 Leave a comment

Below are several excerpts from The Economist regarding quantitative easing and its effect on asset prices:

Effect on stock market and investor sentiment:

Research by Morgan Stanley shows that previous rounds of monetary stimulus have had the effect of boosting the valuation of the stockmarket (a higher price-earnings ratio) without boosting profits (as measured by earnings per share). In addition, QE has boosted investor sentiment. So one interpretation of the evidence is that QE results in what Fredrik Nerbrand of HSBC describes as a “sugar high”—a rush of blood that does little for long-term economic growth.

Low interest rates:

However, analysts may be underestimating the economic benefits of QE. It is impossible to know what things would have looked like without the previous rounds of monetary stimulus. And even if QE has no effect on economic growth, it may still be rational for investors to buy equities. That is because Ben Bernanke, the Fed’s chairman, also signaled that interest rates would be kept at their current ultra-low levels until 2015. Such low rates will also keep a lid on short-term bond yields. So investors will be pushed out of low-risk assets and into the stockmarket.

Commodities:

The other asset class to benefit from previous rounds of QE has been commodities. This seems rational. If investors think QE helps economic growth, then demand for commodities should rise. Low interest rates reduce the opportunity cost of holding non-yielding assets such as gold. And investors may perceive that QE increases the long-term risks of inflation, which also makes some commodities more attractive.

Possible outcomes of QE:

Such uncertainty is perfectly understandable. After all, QE on this scale has never been tried before. There are three possible outcomes. One is that the economy remains stagnant with inflation low, as in Japan; the right strategy in those circumstances would be to buy government bonds. Another is that the economy recovers to pre-crisis growth levels; the right strategy then would be to buy equities. The third possibility is that inflation accelerates rapidly as central banks lose control; in that case, buy commodities, especially gold. Investors have to hedge their bets against all three outcomes, which explains the apparently contradictory combination of rising equity and commodity prices, along with low bond yields.

Source: The Economist

Sunday Political Cartoon

Sunday, September 30th, 2012 Leave a comment

Credit: David Horsey — Tribune Media Services

Source: US News & World Report

Innovation Without IP Protection

Sunday, September 30th, 2012 Leave a comment

Does enforcement of intellectual property rights stifle or spur innovation? There is no definitive “yes” or “no” answer to this question. Interestingly, University of Virginia School of Law professor Christopher Sprigman, co-author of “The Knockoff Economy,” explains how many creative industries thrive without copyright or patent protection in this video from Bloomberg Law:

Video produced by Josh Block

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QE and Equities

Saturday, September 29th, 2012 Leave a comment

Here is a great chart showing the effect of QE chatter on equities over the last several months:

Source: The Wall Street Journal

Hat Tip: The Big Picture

Spanish & Italian Bond Yields

Saturday, September 29th, 2012 Leave a comment

Here are Spanish and Italian bond yields (monthly averages, with the most recent data standing in for September):

Source: Krugman Blog (NYT)

Source: Euro Update: The Perils of Pointless Pain(Paul Krugman)

Source: The Wall Street Journal

Source: Spanish, Italian Yields Up on Bailout Uncertainty (WSJ)

 

Fiscal Cliff Compromise? (Chart)

Saturday, September 29th, 2012 Leave a comment

PIMCO lays out an excellent, easy to read chart of where Democrats and Republicans stand on key political elements regarding the fiscal cliff:

Source: PIMCO

Hat Tip: The Reformed Broker