The quantitative easing (QE) program of the US Fed has been blamed for the run up in stock prices, especially in the US. The cheap money that is the result of the QE program is held responsible for increasing liquidity in the markets thereby leading to higher prices. However a recent study conducted by McKinsey & Co disputes this assumption. The study claims that the QE program has not fuelled the market rally. The reason for this is that usually when stock markets rally, there is an increase in consumption. This increase is driven by the wealth effect as investors tend to spend more owing to the handsome returns earned on their portfolios. However this time around, this does not seem to be the case.
However, ex US Fed Governor, Kevin Warsh does not appear to be agreeing with this. As reported by Money News, Mr Warsh has stated that "The Fed's interest-rate suppression has pushed investors into stocks". In our opinion Mr Warsh's theory is closer to the truth than the findings of the study conducted by McKinsey. This is because the corporate earnings in the US have taken a hit. But despite this, the stock markets have continued to rally. This is a clear sign that there is a bubble brewing that has been brought about by excess liquidity. This liquidity in turn is a factor of the QE program.
However, ex US Fed Governor, Kevin Warsh does not appear to be agreeing with this. As reported by Money News, Mr Warsh has stated that "The Fed's interest-rate suppression has pushed investors into stocks". In our opinion Mr Warsh's theory is closer to the truth than the findings of the study conducted by McKinsey. This is because the corporate earnings in the US have taken a hit. But despite this, the stock markets have continued to rally. This is a clear sign that there is a bubble brewing that has been brought about by excess liquidity. This liquidity in turn is a factor of the QE program.
No comments:
Post a Comment