Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
There are multiple downsides to such a program as an open ended QE as every thing has pros and cons but one I will point out now and will repeat into the future is, a large part of the magic of the Federal Reserve the past few years has been the “Don’t fight the Fed” mantra. Markets have generally gone up on quantitative easing/operation twist programs. And the market has been buoyed countless times by even rumors of new operations beginning in between programs.
So by having what is in effect permanent programs you lose both those advantages. There will be no more WSJ or Reuters leaks about the potential for an imminent QE 4, QE 5, or whatever number because this is QEn. More damaging than that is a lot of this is the emperor’s clothes theory ala Wizard of Oz. What do you think happens to the psyche of the market the first time there is a >10% correction during open ended QE?
For now none of this matters, but when the first real selloff happens during “open ended” QE – observing the reactions of the people in the marketplace will be fascinating. That said, make no mistake we are in a completely different era where the central bank owns the band, and everyone is dancing to their tunes. May we live in interesting times.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
