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Is QE creating an asset bubble?

The soon-to-be Fed Chair said that QE has not caused an asset bubble.

The soon-to-be Fed Chair said that QE has not caused an asset bubble.

Last week Janet Yellen, President Obama's nominee to chair the Board of Governors of the Federal Reserve System, made her first appearance before the Senate Banking Committee. During the hearing, Yellen noted that there is no set timetable for tapering the Fed's quantitative easing (QE) program. In addition, she rejected the notion that QE was contributing to the emergence of asset bubbles. 

Yellen, who is the current Vice Chair of the Fed, told the committee that she is a staunch supporter of Ben Bernanke's views about QE. While she acknowledged that the program cannot continue indefinitely, ending it too early could be costly to the financial market. 

Several Senators brought up the topic of asset bubbles, citing the fact that major indexes are hitting record highs despite a struggling job market and a slow-growing economy. They also questioned Yellen about equity risk premium metrics suggesting a bubble. In response, the Vice Chairwoman said that the Fed is not mandated to support the stock market. 

So, does QE really have no direct effect on the stock market? Some investment strategists disagree with Yellen's assertion that the Fed's bond buying program is not fueling an asset bubble. In one of his weekly notes, John Hussman advises investors to not get too comfortable with the historic market highs and to not put all of their faith in the market's future in the Fed's QE program. 

"Though quantitative easing has no mechanistic relationship to stock prices except to make low-risk assets psychologically uncomfortable to hold, investors place far more certainty in the effectiveness of QE than can be demonstrated by either theory or evidence," Hussman wrote. "The argument essentially reduces to a claim that QE makes stocks go up because 'it just does.'"

He also noted that similar to popular tech and internet stocks of the 1990s, QE is novel, and novelty feeds an investor's imagination. As a result, most of what investors believe about the program is may not be accurate.

In his Seeking Alpha column, seasoned trader and analyst Joseph Stuber, echoed Hussman's assertions and concerns about QE. While there are no hard and fast rules or exact metrics that can pinpoint whether or not we are in a bubble, market conditions including inflation, unemployment and GDP growth suggest that we are in the territory, according to Stuber.

Stuber also mentioned that he fears that inexperienced investors are receiving inaccurate advice from traders who do not believe that we are in an asset bubble. These individuals are being encouraged to hold and buy stocks at all-time highs, which will put them in an unfortunate place if the bubble bursts. 

Yellen is expected to be confirmed as the chair of Fed and the QE program will most likely continue for a significant period of time. To stay informed about market developments and set automated alerts in the event of future volatility investors should consider using SmartStops' investment tracking software

Categories: Stock News

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