21 September 2012
Well, regardless of what the Fed might want, or even tell us, to do, I don't think it's the Federal Reserve that dictates what we actually do. They may lay the groundwork, but the emotions of traders and investors that dictate what we do. In the months leading up to the recent QE3 announcement, the emotions of traders and investors led most to buy stocks.
This dynamic may continue. But before it does, I think enough players will reconsider the non-impact of QE on the economy and the extent to which it is priced into the markets already. Analysts are already talking about the obvious hike to inflation expectations. But nothing is ever obvious in the market. Keep in mind that official estimates of inflation have remained contained during every session of money printing and risk taking. Assets most dependent on global growth, namely commodities, may be pressured or remain stagnant since no notable growth improvements are likely to happen soon. Thus, inflation expectations may be tempered in the near-term if commodity prices don't reflate soon.
Should I be right about the timing of this correction, it's important to be nimble - any correction in risk appetite may be short-lived. Investors may remain content buying stocks and other assets.
Looking further down the line, however, may reveal a potential deep psychological impact on investors. That is: the promise of unlimited QE removes the anticipation of any new QE.
No new recommendations or adjustments at this time.