Friday, October 16, 2015

QE: What if investors don't buy it?

John Authers has written another good column. It's about "what happens if rates never rise." Among many interesting things, he reminds us to watch profits (payrolls and GDP are secondary, really). He also walks us through the (increasingly plausible) scenario where the Fed doesn't raise rates at all, and  the central bank needs to resort to QE to counter an economic slowdown.

He writes, in passing, something with disturbing implications:
The risk continues to be that investors at some point give up on monetary policy and its power to make a difference — and that would be bad for stocks. So rather than plan for a continued indiscriminate rally in US stocks, it is probably better to focus on those that can show some sustained pricing power, and on those that pay a decent yield.
That first sentence (emphasis mine) entails a mind-blowing possibility. What it the emperor has no clothes?  What if the main (only?) effect of QE is through higher asset valuations? What if QE works because investors think it works and nothing else? What if investors wake up and decide that QE doesn't work?

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