Personal Wealth Management / Expert Commentary

Ken Fisher Discusses Why Most Investors Misunderstand Quantitative Easing

Many investors fear that when the Federal Reserve begins tapering bond purchases—aka quantitative easing or QE—the stock market could be headed for trouble.

However, Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher says these fears assume QE is a form of economic stimulus, which he says is exactly wrong.

Transcript

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Ken Fisher: One of the things that's caused certain amount of people a certain amount of fear as we've moved through the summer, is the Fed's July announcement that later this year, 2021, they would start “tapering” is the phrase they use, off of their bond purchases in what otherwise is thought of as quantitative easing. And this is commonly thought to be bearish because most people, and I will say falsely presume, that quantitative easing is stimulus. Quantitative easing is always described as stimulus. Quantitative easing is not stimulus.

Ken Fisher: Now, I'm just going to say this simply. I've written about quantitative easing since quantitative easing was first deployed in America, now over a decade ago. And if you just hear me out for a second, I'm going to tell you that quantitative easing is almost always and by everybody, including the people that are supposed to be the most sophisticated people on all this stuff, completely misunderstood, upside down and backwards. It is not stimulative, it is not inflationary, it doesn't create money. It is contractionary and deflationary and always has been everywhere it's ever been applied.

Ken Fisher: The fact is, in America, or in Britain or in Japan, in the Eurozone where quantitative easing has been deployed, it is not any of the things that people have thought it to be. And I've always found it just stunningly amazing that that isn't understood better. But, I'm not going to take a lot of time on this now, just a little bit. But if you want to read me or see videos of me on why quantitative easing isn't stimulative inflationary up one side and down the other, but is in fact contractionary and deflationary, and therefore the tapering of it in reverse is actually stimulative.

Ken Fisher: If you just do a Google search of Ken Fisher quantitative easing, it'll take you to a lot of stuff going back a long time in lots of different formats of whatever type of format you'd like to read or see me in for that--including videos. Including videos of me on TV doing that. But the fact is, banks are in the core business of taking in short term deposits to finance long term loans, and the spread between them is parallel to their gross operating profit margin. It's reflective of the profitability of subsequent loans that they will make. And the bigger that spread is, the more incentive they have to lend.

Ken Fisher: Now, central bankers and so many others have always thought of quantitative easing in the vein of we've got low short term interest rates, we push long term interest rates down low. At low interest rates, people will want to borrow. And the lower interest rates are, the more people do have a propensity to borrow. That's true. That's what you could think of as demand side thinking about interest rates and money. Lower interest rates will cause more people to want to borrow, but with rates already low, pushing them down a little lower does not have much effect on lending only, it's a little tiny bit.

Ken Fisher: In fact, the more you make that spread between short- and long-term rates smaller, which is what quantitative easing tends to do as central banks use their credit to buy bonds, pushing up the price and down long-term interest rates. Inherently, as you push the price of bonds up, long term interest rates go down, you know that they reduce that spread and disincentivize banks from lending. And the more they disincentivize banks from lending this is supply side thinking the more banks don't lend. When banks don't lend, it's not inflationary, it doesn't create money, it is not stimulative. In fact, it's the reverse of all those things, the tapering that motivates the central bank in their mind to be less prone to try to keep interest rates low. That is, they're not going to put so much on the demand side in reciprocity actually bouys up the bank's supply side tendency to lend. And whenever quantitative easing has been tapered off in the past, it's very bullish. It's stimulative, it's great for stocks, it's just generally great.

Ken Fisher: So, this thing that they fear is a false fear. False fears are always bullish. Tapering, to the extent they really do it, will be a good thing for stocks, for the economy, for lending. It is just generally good all the way around. And I've now, after over a decade of this, kind of given up on the notion that people will get this in their brain, right, they're going to keep thinking of it upside down and backwards. But you as an investor should embrace the fear of tapering and not subject yourself to what some people would call a “taper tantrum’, because there's nothing about tapering that's bad. It's all good.

Ken Fisher: Thank you very much for listening to me today.

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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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