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Read the article about Federal Reserve policy and the stock market in late 2019. In your opinion is a possible quantitative easing policy good or bad for the stock prices in general? Provide examples to support your opinion. The article mentions that low interest rates worldwide might make it difficult for monetary policy to generate economic growth. In your opinion do you agree with that or not and what would that mean for the stock market prices in the future? Are there any particular types of stocks that you believe would be helped or harmed more by Federal Reserve quantitative easing? Provide some examples. The last part of the article suggests that adding gold to a portfolio will improve the Sharpe ratio of the portfolio. Do you agree with that or not? How would a quantitative easing policy affect gold prices? You do not have to address all of these question; they are merely suggestions of some things to think about.Is the Fed Gearing Up for a New Round
of Quantitative Easing?
Frank Holmes Contributor
Great SpeculationsContributor Group
Markets
UNSPLASH
“This is not QE. In no sense is this QE.”
That was Jerome Powell in early October, answering a reporter’s question on whether the
Federal Reserve’s intervention in the overnight U.S. repo market constituted another round of
quantitative easing (QE).
No, the Fed chairman insisted, the bank’s $60 billion-per-month Treasury purchases are intended
simply to add extra liquidity to the financial system after repo rates spiked in September.
Be that as it may, because of the purchases, the Fed’s balance sheet is expanding again for the
first time since the bank began to unwind in 2017. In fact, this is the fastest monthly rate of
expansion since the initial round of QE began in December 2008.
U.S. GLOBAL INVESTORS
Judging from this alone, you would think that we were on the brink of another financial crisis,
even as Powell himself says the U.S. economy remains strong.
Today In: Money
And it’s not just the U.S. According to Bloomberg calculations, the combined balance-sheet
growth of the Fed, European Central Bank (ECB) and Bank of Japan (BoJ) will soon reach an
estimated $100 billion per month.
Markets seem to be betting more accommodative measures are on the way. Since Powell’s
October press conference, the S&P 500 has surged about 8.4 percent, putting stocks within
striking distance of logging their best year since 2013.
PROMOTED
Others see QE4 happening sooner rather than later. In a research report this week, Credit Suisse
analyst Zoltan Pozasar told investors that, in order to calm short-term funding markets, the Fed
will need to implement another round of quantitative easing “by year-end”—which is only three
weeks away.
Synchronized Easing: Is “Japanification” Spreading to the U.S.?
Central banks have other levers, of course, to combat slower economic growth, and we’re seeing
them pull those as well as pumping liquidity into the system. This year, the Fed, ECB and BoJ
have either cut lending rates or kept them steady at below 0 percent, with Japan hinting that it
might trim rates further and President Donald Trump publically pressuring Powell to implement
a low-interest policy that’s more in line with other economies.
U.S. GLOBAL INVESTORS
Some economists use the term “Japanification” to describe the process of being permanently
stuck in an environment of low inflation and even lower rates, which leaves policymakers with
few options to jolt the economy.
This isn’t a phenomenon seen just in developed economies. Emerging markets are in rate-cutting
mode as well. Last month, there were as many as eight net rate cuts among a group of 37
developing economies. In fact, November marked the 10th straight month of net cuts, the longest
easing cycle for emerging market central banks since 2013, according to Reuters.
U.S. GLOBAL INVESTORS
Where to Invest in a Low-Yield World
So what does this all mean? It means that central banks may be telescoping the possibility of an
economic pullback. Should that happen, it’s unclear what other ammunition banks will have at
their disposal.
More to the point, what can investors be doing to prepare for such a pullback? Right now, many
are exiting stocks. According to the Wall Street Journal, analyzing Refinitiv data, investors have
so far this year pulled $135.5 billion out of U.S. stock-focused mutual funds and ETFs—the most
ever in a single year going back to 1992. A lot of this money has found its way into bonds and
money market funds, assets that are perceived as safe haven investments.
But with yields near 0 percent on an inflation-adjusted basis, investors may be better served by
focusing on another asset.
Again, take a look at what central banks are doing. Since 2010 they’ve been net buyers of gold,
which has historically performed well in times of economic and financial turmoil. In 2018, they
grew their gold holdings at the fastest pace in nearly 50 years.
As I’ve explained many times before, gold has been a good diversifier. It’s been shown
to improve a portfolio’s Sharpe ratio, or its risk-adjusted returns relative to its peers, based on
standard deviation.
I’ve always recommended a 10 percent weighting in gold, split evenly between physical gold
(bars, coins, jewelry) and gold equities (well managed gold mining companies, mutual funds,
ETFs).
For full disclosures pertaining to this post click here.
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Frank Holmes

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