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« Weighing the Week Ahead: Bernanke Meets the Press, Round 2 | Main | Analyzing the Effect of QE II »

June 20, 2011


Jim Kerns

As they say on Wall Street, "if you can't tell it, you can't sell it". We'll see if he heeds this tomorrow. JK


inkerton - the point about bond yields is valid, but I can only do so much in each article. Please bear with me and check out tonight's piece.

As to "anticipation" I do not agree. If there is a direct effect, there is no reason to trade three months before the move. Everyone who did poor correlation analysis will be writing something like this. If you do statistical analysis of causation, you go with the numbers. If you are going to make a psychological argument, you are in a different universe.

As you note, there are several other things going on.

More soon, and thanks.



You say: "...none of those who explain the market rally in terms of Fed action provide any reasoning for the relationship"

While I agree wholeheartedly with your explanation of M2 and there being no (or at least not many) additional funds for speculation, I disagree with the above statement a bit.

In my view, and as I have heard others say, the way in which QE2 'manipulated' the market was by driving the yield on Treasuries (and consequently other bonds) lower than it would otherwise have been. Accordingly, holders of existing currency in bank accounts, and holders of existing bonds, were more likely to seek higher returns in stocks, though also perhaps in commodities. No additional M2 required.

That may not be correct, but it's a stated rationale.

It would similarly apply to this statement of yours later: "continuing injection of Fed liquidity over the last ten weeks has had a negative effect, refuting the hypotheis of direct causality."

That is to say, as speculators anticipate the end of QE2 and the consequent anticipated rise in bond yields, they are piling out of things like stocks.

Now of course there are all kinds of other reasons why investors might recently be doing those things as well.

Dal Paull

Lame-Ass Explanations, indeed! Jeff loves to seek them out and expose them for their true lameness. It needs a proper acronym, however. LAEX doesn't quite cut it.

Feel free to delete this Silly Irreverent Comment (sic).

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