For those of you who have been hiding under a rock or maybe just on a long vacation, the term QE — and in this case QE3 — refers to the U.S. Federal Reserve increasing the overall supply of U.S. dollars in the banking system or what we like to call “printing money.”
Quantitative easing is actually the U.S. government buying securities (such as U.S. treasuries or bonds) from banks with newly printed greenbacks (electronically speaking) to increase the money supply and lower interest rates.
This should not be confused with Operation Twist, which some of you may be familiar with. OT is where the central bank buys long-term debt back from banks and simultaneously sells short-term debt it holds, helping lower long-term interest rates.
Policy-makers would argue that this strategy is to help the economy grow by making it easier to finance cars, homes and businesses.
When you are in debt to the tune of around $15 trillion, might there be another motive?
The current speculation on QE3 is interesting.
As you know we are in year four of the U.S. presidential cycle and the election is a little over two months away. There has always been a great deal of prognostication on the equity markets and U.S. presidential elections.
There are plenty of statistics around the four-year cycle and the stock market. The one I find the most interesting is that how the market does in the three months leading up to the election is a pretty strong predictor of who wins the election.
Apparently, there is an 87-per-cent correlation between this three-month performance report and the election.
I would think we have a pretty good chance of seeing QE3 if it helps the market and gets Obama and the boys another four years in office.
Another presidential election stat that should come into play is that the market is up substantially since the last election.
It’s not like there was magic. I guess that happens when you are elected just after or during the collapse of the housing and stock markets. Stats argue that when the market is up substantially the incumbent should win in a landslide.
I am not really certain what to think about the election. The Republicans have a pretty strong
following and will go hard after reducing debt, cutting taxes, reducing spending (health-care reform?) and paying bankers substantial amounts of cash.
One thing I am pretty sure of is that interest rates are down and should stay down for the foreseeable future.
Whichever government gets in this coming November will most likely continue the low interest rate policy and as long as the U.S. does, Canada should follow suit.
Les Consenheim is a financial adviser with Raymond James - Consenheim and can be reached at 250-372-8117 or firstname.lastname@example.org. Raymond James Ltd. is a Member - Canadian Investor Protection Fund. This article is for general information purposes only. The views of the author do not necessarily reflect those of Raymond James. Individuals should seek professional advice prior to acting on any information referred to herein.