What happens when QE2 ends?

QE or quantative easing is effective “money printing” by central banks- the USA being the worst culprit at present resulting in the huge fall in the value of the dollar. 

Where the markets are concerned the QE debate boils down to two basic fundamental positions of those that are profiting from the stocks and commodities bull markets against those of perma-bear persuasion that not only consistently miss whole bull markets but give up all of any gains they may have made during preceding bear markets. Now whilst some may conclude that it is a case of perma-bears arguing against perma-bulls, however that is not quite accurate for in a bull market Investors must be a Bull, likewise in a bear market, investors should be bears, because that is how one preserves and grows ones wealth and not by betting against EITHER bull or bear markets. 

The whole point of QE money printing asset buying was to generate economic growth by means of boosting the wealth effect. What the central bankers such as the Fed and BoE never factored into their formulae’s was that the Banks would use the cheap money to buy stocks and commodities on leverage rather than make loans to main street, hence sending asset and commodity prices soaring well beyond even the real inflation rates of between 7% and 9%, despite the fact that they did the exact same thing during mid 2008 to crude oil. 

Implication for stocks – Just as QE1 and QE2 were BULLISH (inflating asset prices) so will QE3 and after it QE4 that reinforces the primary bull market trend. 

Will the U.S. stop printing money whilst the budget deficit remains anywhere near 10% of GDP (current approx 9%)? 

Is there likely to be QE3 and potentially QE4? – I think so – it’s just we don’t know when!! 

When QE1 stopped, the markets went into freefall and were only saved by the announcement of and enactment of QE2. This  current phase is scheduled to stop at the end of June 2011. 

Conclusion

In terms of market timing, weakness ahead (how much could the market drop?) at the end of QE2 in May/June and into the no mans land before the likely announcement of QE3.

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