QE and Bubbles

Did QE create a bubble?

Will the stock market pull back when the historically low interest rates go up?

These are questions we hear all the time from prognosticators who make their money selling predictions. I always start by reminding my clients that other than interesting conversation material, these topics and their answers will not have a bearing on how I advise them invest. Our approach is much longer in view and these current events will have little to do with your long term success as an investor. Your response to these discussions, however, will affect your financial situation greatly.

What is QE?

QE is short for Quantitative Easing—easing of the interest rate environment through the government’s purchase of long-term bonds backed by Fannie Mae and Freddie Mac mortgages. Since the federal government owns every part of the process, it can play with all the pieces. When the government decides to print money so that it can purchase bonds – increasing the demand for them – they can do so. This raises the price – lowers the yield – which lowers rates to the end user. So, homeowners are happy. They are either lowering their mortgage payments, or paying off their homes faster. Either way they are benefiting financially. The “bet” made by the government is that more people will purchase homes and spend the extra money they saved in the economy. And to be sure, some have done this.

1. So is there a bubble and was it created by QE? The likely answer to both is yes. Governments are very good at creating them, as you’ll see on the 29th.

2. Is there something specific you should be doing as a result of this particular bubble? No.

There is another reality that exists counter to the simplistic explanation for QE and its effects. Many believe that QE has actually slowed growth. They hold that when the government releases its hold on the economy (the hold that QE represents), that more growth, not less, will be the result. They point to the yield curve, which today is essentially flat, which means that short term rates and long term rates are the same. Historically, converse to our current situation, when a normal yield distribution exists (long-term rates exceed short) the growth has been the best.

So, don’t buy wholesale what your elected leaders are feeding you. QE has had and will continue to have unintended consequences. But has the recipe for success changed for us as a result? NO!

We will still…

1. Invest in equities.

2. Rebalance when asset classes move apart.

3. Repeat that process above for 70 plus years – Lord Willing.

4. Live within our means; pay off all consumer debt and then our mortgage as well.


On the 29th, we’ll discuss the many bubbles in our history and the one answer that would have helped (and will continue to help) more than any special trick or quick fix.

See you then!


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