Ben Graham once described the stock market as follows:
“In the short run it’s a voting machine, but in the long run it’s a weighing machine.”
The votes are in and they are unanimous, so far. Equity investors are voting that QE will do something to improve the economy. However, that does not mean it actually will do something for the economy. I believe there is no fundamental reason for equities to sustain gains due to the Fed's second quantitative easing program. That is not the same as saying that equities can’t move up here even more in the short-term. Equities move for any number of reasons in the short-term – many of which are entirely irrational. If QE somehow results in economic recovery down the line and we get back to full employment I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place). At that point, the market will have weighed the facts and concluded Ben Bernanke was in fact correct to push for higher asset prices.
The very idea of this as an economic strategy is frightening to me. If QE actually works then there is no need for fundamentals. Why does anyone get up in the morning and go to work? We can all just go out and open a Scottrade account and let Ben pour money into our accounts. Unfortunately, that’s not the way economics works. You would have thought we would have learned this after two bubbles in less than ten years, but no. Here we go again. Some of this appears like common sense, but as Mark Twain once said: “Common sense is not so common.” Personally, I wish it was this easy. I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe.
Place your votes in the short-term. But don’t forget you could get crushed by the weighing machine in the long-term.
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