How Markets Will Handle End of Money Printing Era

Markets Will Handle End of Money Printing EraIt’s finally over…

The quantitative easing programs initially started by the Federal Reserve six years ago are (for now) history.

In its statement on October 29, the Federal Reserve said, “Accordingly, the Committee decided to conclude its asset purchase program this month.” (Source: “FOMC Statement,” Federal Reserve, October 29, 2014.)

The reason for ending the quantitative easing: “The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment…” (Source: Ibid.) In other words, the U.S. economy is going in the right direction.

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While I support the decision of ending the quantitative easing, I don’t agree with the Federal Reserve’s notion that the U.S. economy has improved.

Long-term readers of Profit Confidential know my take on quantitative easing: It really hasn’t done much for the broad economy. It’s made the big banks stronger, it’s made Wall Street richer, and it’s made the rich, richer.

But regular everyday Americans are still worth a lot less today than they were in 2007. The unemployment rate in this country, when including those who have given up looking for work and those who have part-time jobs but want full-time jobs, is still around 12%. The labor participation rate (adults who can work and are working) in this country is at a 30-year low.

In my opinion, the quantitative easing programs of the Fed are responsible for income inequality in the U.S. economy reaching its highest level since 1928! (Source: Pew Research Center, January 7, 2014.)

And “demand” in the U.S. economy remains dismal despite almost $4.0 trillion printed in new money through quantitative easing. In September, new orders for durable goods (goods that last a long time, like home appliances) dropped 1.3%—the second consecutive monthly decline.

Inventories at the durable goods manufacturers have gone up in 17 of the last 18 months! And manufacturers are pulling back on capital investing; orders for capital goods in September declined 5.4%. (Source: Census Bureau, October 28, 2014.)

If the U.S. economy is improving, how can demand, consumption, and capital indicators be on the decline?

The stock market is addicted to quantitative easing. In the past, each time we heard the Federal Reserve was printing more money, stocks moved higher. If the economy isn’t doing well and the Fed isn’t printing money any more, what’s there to fuel stock prices? After all, stock values are already at historical highs.