The Fed has done it again. Over the last four years the government has embarked on a variety of different stimulus programs. The Fed’s main programs have been Quantitative Easing (QE), Zero Interest Rate Policy (ZIRP) and Operation Twist. ZIRP isn’t anything more than a glorified jawbone, so we won’t spend any more time analyzing it. Some people have lumped the Operation Twists and QEs into one big bond-buying stimulus category. But this is a mistake as the effects of these two operations are quite different and should be analyzed separately. This article will look at a variety of assets to see how they responded to the QEs and Twists.
Before we get started we must first define the programs' starting dates. There are a couple of different interpretations. November 25, 2008 is when the Fed announced QE1. The Fed started buying bonds the following week. The November 25 date is by far the most commonly listed as the start of QE. QE1 ended in March 2010. The Fed gave an extremely strong hint for QE2 in Ben Bernanke’s infamous Jackson Hole speech on August 27, 2010 but the Fed didn’t officially start buying bonds until early November. We’ll use the August 27 date. QE2 ended June 2011. The Twists started on September 21, 2011.
Now that we have gotten the formalities out of the way, let’s get right to the data, which can be viewed here.
The numbers in the chart are annualized. Overall refers to the start of QE1 (November 25, 2008) to the night before QE3 (i.e. Wednesday September 12, 2012). Note commodities act very differently during QE than Twist.
Let’s start off by seeing how effective QE was with respect to what the Fed was trying to accomplish. The Fed has a dual mandate of price stability and keeping unemployment low. The inflation rate during the QEs was 2.7%. That’s too high.
The unemployment rate went up by 15.3% annualized during the QEs. That is also not good.
What else is the Fed trying to accomplish? Well the Fed has been buying bonds directly in an effort to stop the housing crash. Arguably one can rank lowering bond yields and raising housing prices as the No. 3 and No. 4 most important goals for the Fed. Using iShares Barclays 20+ Year Treasury Bond (TLT) as a proxy for bonds prices would suggest the Fed fails once again. Despite spending trillions on bonds, bond prices went down 9.4% on an annualized basis during quantitative easings. Why? Inflation concerns.
Quantitative easing didn’t stop the real estate crash either. During QEs real estate was down 5.5% on an annualized basis.
So far the Fed is 0 for 4. What’s next on their list? Probably stocks. Here the Fed finally gets on base with a 30% annualized return.
Are there any other goals the Fed is trying to accomplish? The Fed wants oil and commodities to stay low. While one can argue that this is part of the Fed’s inflation mandate, the Fed wants housing to go up, which is the biggest component of inflation by far. In any event, oil went up 41.8% annualized during the QEs and commodities in general increased by 25% annualized. Not good.
It is clear that quantitative easing has been a near complete failure for the Fed. What to do? Stocks went up 30% annualized while commodities went up 25%. Within the asset class of equities, the more speculative Nasdaq and small cap Russell indices fared even better than the S&P 500. As for individual commodities, cotton was the big QE winner with silver also faring very well.
I have written quite a few articles since late March which have shown that when bond yields collapse (like they did), stocks always go up, commodities usually go up, and bonds always go down. The QE study offers similar conclusions. About the only difference is when bond yields drop, commodities go up about 75% of the time and during QE they have gone up 100% of the time. As for the short side, bonds continue to be the No. 1 play. However, shorting anything other than bonds and the dollar looks risky.