The QE Long Game: We Have Seen This Movie Before

Prior to the 2008 financial crisis, the use of quantitative easing was considered unconventional. It was a last resort policy that could only be justified as a means to avoid complete economic devastation. At the time, few were aware this policy tool existed and was an option for central banks. I recall Googling this foreign concept because despite being fresh out of college with degrees in finance and accounting, I had never heard the term. If you haven't already done the same, here is the formal definition: Quantitative easing is a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets (municipal bonds, mortgage-backed securities, corporate bonds, and even stocks) to inject money into the economy and expand economic activity. As we learned during the Covid-19 crisis, purchasing corporate bonds acted as a market stability tool because it instilled confidence in investors. Some refer to this as the Fed Put option. Since initially pulling the ripcord, quantitative easing has mostly been a part of everyday life for the federal government (there was a pause of the operation between 2014 and 2020 but monetary policy was overall accommodating during that time). I am not here to debate whether the policy is right or wrong, just to point out the impact the practice has had on asset prices and whether that trend continues. Aggressive stimulus enacted to avoid harsh economic cycles has resulted in a significant increase in the supply of money. While the concept of quantitative easing and other stimulus programs are complex, the simplest explanation is the more money there is floating around, the higher asset prices tend to be. This Feels Like the Early 2010s All Over Again In the years after the financial crisis, but more notably the historic injection of liquidity into the U.S. economy, all assets moved higher together. I can't think of an exception -- corn, soybeans, wheat, oil, natural gas, gold, silver, stocks, and even Treasuries moved higher as the dollar pressed lower. Chart Source: QST It is nearly two years after the March 2020 Covid crisis, but more notably, two years after the government threw every penny available (and those not yet created) along with the kitchen sink into the U.S. financial system. It worked...but probably too well. If this is anything like 2010 through 2012, we should see all assets increase in value, mostly without regard to common sense. In short, if this round of QE has the same effect as the last, in the coming year or two there will be an abundance of money out there chasing a limited number of goods; investors will look to park it in any asset available to them. The Potential Big Winners of QE Aggressive government stimulus is intended to lift asset prices overall with the theory it will spur consumption via the wealth effect. But the consequence is higher food and energy prices as we have already been seeing. In our view, oil traders have essentially been front-running the Fed by pricing in this inflation in advance, but we believe the grains have some room to move higher (potentially irrationally and violently). Further, in the last go-around, the precious metals market enjoyed historical rallies. Silver futures rallied to almost $50.00 per ounce in early 2011 and after a large correction took a crack at $45.00 per ounce. Despite more than a decade's worth of opportunities, silver hasn't been able to hold above $30.00 since and has spent most of its time below $20.00. The gold rally of 2011 peaked at around $1,920, a high that held for nearly a decade before being retested on the heels of the Covid crisis in 2020. Chart Source: QST Both gold and silver have fallen out of favor, despite being considered the darlings of commodities a year ago. Precious metals have spent the last six to eight months struggling to find buyers on dips and running into walls of selling at resistance levels. Yet, the market sentiment has become extremely bearish in these two metals at a time in which the U.S. dollar is approaching significant resistance. If we truly are seeing a repeat of the period following the financial crisis in which the bazooka-style monetary policy props up asset prices and pressures the U.S. dollar, gold and silver are looking quite cheap. Bottom Line The stimulus honeymoon is over, but that doesn't mean the commodity and financial markets won't continue to be influenced by the increased money supply. Although the Fed is tapping the brakes, monetary policy is still deserving of a hefty speeding ticket. Further, government policy effects linger for years -- the impact isn't immediate nor quickly dissipating. Thus, there is a good chance we see the majority of commodities and even financials (broader stock market and Treasuries) benefit in 2022 from the easy money policies of the pandemic.

The QE Long Game: We Have Seen This Movie Before

The stimulus honeymoon is over, but that doesn't mean commodity and financial markets won't continue to be influenced by the increased money supply.

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