Will QE3 really work?

Founder and Publisher of the Switzer Report
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The critical question all investors have to ask after QE3 is – will it work? And for that matter, will the European Central Bank’s (ECB) bold plan to stimulate growth and bring down borrowing costs for debt-laden countries such as Spain and Italy work?

There are doubters out there and I can understand that, as some argue that the first two US stimulus packages – QE1 and QE2 – failed, so why believe in QE3? But as they say in the classics, this time is different!

Did I really say that? I know it’s a big mistake to come to this line, as there have been many celebrated failed experts who uttered this, but I’m prepared to gamble with it.

Outlook

In a nutshell, I can see a growing snowball of confidence. However, it still has some distance to go and it must negotiate some potential roadblocks before it grows to a size that is so noticeable that most of the nervous businesses, consumers and market investors will be prepared to change their careful ways.

This is what happens when a boom is created and it’s often not long before it again ends in tears. Right now we are in what Warren Buffett would call that time when most people are fearful and that’s why I’m ‘greedy’.

When the snowball is looking big and beautiful, that’s when I will be warning my readers and financial planning customers to be cautious.

Sure, I’m aware that these are still challenging times, but from an investment approach, as I have said a number of times, I buy great companies at low prices because I want to hold them for at least three or five years, maybe longer.

Getting the balance right

Now, I know there are doubters out there and Marc Faber of the Gloom, Doom and Boom Report is a classic critic of QE3, Ben Bernanke and the ECB. Of course, he’s talking his own book because he has been negative and the stock market has proved him fallible!

I named him some months ago as being too negative and wrong and I hope he stays that way. I’m never ‘totally’ confident about my bigger calls because there are always so many potential curve balls you have to hit in the market prediction game. I like to use the ‘balance approach’ of totaling the positives and negatives and seeing what makes sense.

Faber recently blamed “ultra-expansionist of monetary policy” for the latest financial crisis in an interview on CNBC.

“If I had messed up as badly as Bernanke, I would for sure resign. The mandate of the Fed to boost asset prices and thereby create wealth is ludicrous – it doesn’t work that way. It’s a temporary boost followed by a crash,” Faber he told CNBC.

This is selective economic analysis and some parts are right, but some parts are dead wrong!

Historical fact

Bad monetary policy and bad prudential regulation is behind the Global Financial Crisis, but just about all recessions follow a period of monetary excessiveness. And so one day, the QE1-3 will be a part of another crash, but that is a long way off. I’m not saying we can’t see a correction as we have had a big run of stocks since June 4, but I think a crash is some years off.

Of course, if the European leadership frustrates the pluses from the ECB measures or the US Congress sends the US economy over the ‘fiscal cliff’, then a recession could follow and stocks would nosedive.

However, if Europe doesn’t screw up, the US Congress plays ball on deficit-reduction, China’s new leadership continues to stimulate a stronger economic recovery, and QE3 actually helps create a stronger US economic recovery, then stocks go higher in 2013.

A watchful eye

Market experts and yours truly will be pouring over economic data from the EU, China and the USA hoping to see that the stimulus measures are resulting in economic growth and confidence. Confidence is the key and that’s why I describe it as a small snowball that’s growing.

Be aware, we aren’t out of the woods yet, but we are on the right track. However, when we are out and everyone is saying it, the market will go up strongly again. By then, you will have likely missed the first leg-up of a bull market.

On an historical basis, a bear market should go on for a few more years, but I don’t subscribe to set times for bear and bull markets because policy responses can be so different for the periods being compared.

I do know bears, such as WAM’s Geoff Wilson and Matthew Kidman, have always thought 2013 would be the time when the secular bear market would be over and it’s looking very likely, but it will be based on the economic reaction to the monetary stimulation from the ECB, the Fed and the central bank of China.

Right now, I liked Wall Street’s rise last week – up 2.15% – and the VIX, or fear index, is comfortably down at 14.5. But over the next few months we need to see a significant, positive economic response to central bank actions or else Faber will be right.

I think he’s wrong, and so do the investors that have driven up the Nasdaq by 22.22%, the S&P 500 by 16.5% and our S&P/ASX200 index by 8.2% since the start of the year.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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