‘Quantative Easing’ – its Effect on the Stock Market

Quantitative Easing’ is a euphemism for ‘fake money’. It is a high fallutin’ modern-day term given to the simple, ultimately very costly, old fashioned, last gasp of the culpable politician, resort of printing money.

In the longer term the billions of ‘monopoly’ £1 notes printed under this authoritative sounding term ‘Quantitative Easing’ will doubtless have a serious and deleterious effect on the value of Sterling and on interest rates.

The one thing that it hasn’t done is to reduce the potentially frightful impact of the multi-billion pound sovereign debt of UK Plc. piled up by the incompetents who were, and still are, in charge of our national economy and well being.

In the short term it has served to keep the wolf – in the form of a UK economic collapse – at bay. And that, we have to assume was its main purpose – ahead of an imminent general election!

The other achievement of QE is to delay the reckoning that has to come on the stock market. Our concern remains that now, with the withdrawal of the QE ‘funny’ money, that reckoning may be even harder. There can be little doubt that the stock market’s significant 2009-2010 rally is a direct result of the QE printed pounds. Equally then, there should be little doubt that the ending of QE will have a detrimental effect by removing the prop of so many new pounds.

It is also of concern that having ’shot the QE bolt’ there is nothing left in the politicos’ armoury to prevent the next collapse. But perhaps we display too much naivety as we should not be surprised at the audacious short term fixes that our politicians can magic up.

The concoction of QE has had the effect of encouraging the FTSE to rise to a level from which, if the historical stock pricing pattern continues to be followed, will see it crash down again. We have written several times over the last few weeks of the remarkable, and worrying, similarities that exist between the FTSE now and the Dow Jones index in 1929-32 ( see our Jan 28, 2010 blog below – “Is the Current Market Downturn About to Get Worse – Much Worse??”).

The buyers have slowed down on both the UK and US stock markets (our Momentum Indicator is still declining) and the FTSE 100 index is now, once again, on a cliff edge.

The FTSE has support at the 5100 level area and is clinging to this as we write. If that level fails (and we have to say that it is looking as thought it might) then the FTSE 100 will fall quickly to the 4700 area. And, if the historical price pattern continues in play then the FTSE 100 will be down to 3500 within months.

But whichever way that the market goes there is such huge potential for all of us. If share prices do collapse then we will make hay (profits!) on the downside by short-selling stocks. If the market rallies we will be back buying stocks. What we have to hope is that the current sideways whipsawing movement is overtaken by a definitive move, be it up or down.

Then there is the bonanza opportunity. This will be if/when the market crashes to a final low.

Back in 1932 the ‘Dow’ made a final low at 40.5 . This was down nearly 90% from the Oct. 1929 high and equities became a dirty word. No-one wanted to own equities. Bonds became the flavour of the month and subsequent years. Yet by 1937 the ‘Dow’ had risen to 195 – a rise of some 380% in average share prices. And, because of the ‘buy Bonds’ propaganda most missed that huge profit opportunity.

Click on chart to enlarge

So, dear reader, if the FTSE 100 does crash down to the 3500 area later this year we are likely to hear much the same ‘buy Bonds avoid equities’ story but, this time, we – and hopefully you – will be ‘in there’ as soon as the trend change shows itself.

The FTSE 100 Index, weekly -

Click on chart to enlarge.