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

0:03
one of the things that's caused certain
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amount of people certain amount of fear
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as we've moved through the summer is the
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fed's july announcement that
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later this year
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2021
0:15
they would start tapering is the phrase
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they use off of their
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bond purchases
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in what otherwise is thought of as
0:24
quantitative easing
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and this is commonly thought to be
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bearish because
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most people and i will say falsely
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presume that quantitative easing is
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stimulus quantitative easing is always
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described as stimulus quantitative
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easing is not stimulus
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now i'm just gonna
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say this simply
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i've written about quantitative easing
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since quantitative easing was first
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deployed in america
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now over a decade ago
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and if you just
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just
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hear me out for a second
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i'm going to tell you that quantitative
1:02
easing is almost always and by everybody
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including the people that are supposed
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to be the most sophisticated people on
1:07
all this stuff
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completely misunderstood upside down and
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backwards
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it is not stimulative it is not
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inflationary it doesn't create money
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it is contractionary and deflationary
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and always has been everywhere it's ever
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been applied
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the fact is in america or in britain or
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in japan
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where in in the eurozone where
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quantitative easing has been deployed
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it is not any of the things that people
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have thought it to be and i've always
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found it just stunningly amazing
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that that isn't understood better
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but i'm not going to take a lot of time
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on this now just a little bit
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but if you want to read me
1:50
or see videos of me
1:53
on why quantitative easing isn't
1:56
stimulative inflationary up one side and
1:59
down the other but is in fact
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contractionary and deflationary
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and therefore the tapering of it in
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reverse is actually stimulative
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if you just do a google search of ken
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fisher quantitative easing it'll take
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you to a lot of stuff going back a long
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time in lots of different formats of
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whatever type of format you'd like to
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read or see me in for that including
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videos
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including videos of me on tv doing that
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but the fact is banks are in the core
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business of taking in short-term
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deposits to finance long-term loans and
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the spread between them
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is
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parallel to their gross operating profit
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margin it's
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reflective of the profitability of
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subsequent loans that they will make and
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the bigger that spread is the more
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incentive they have to lend now
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central bankers and so many others have
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always thought of
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quantitative easing in the vein of we've
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got low short-term interest rates we
3:00
push long-term interest rates down low
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at low interest rates people want to
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borrow
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and the lower interest rates are the
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more people do have a propensity to
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borrow that's true
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that's what you could think of as demand
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side thinking about
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interest rates and money lower interest
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rates will cause more people to want to
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borrow but with rates already low
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pushing them down a little lower
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does not have much
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effect on lending only it's a little
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tiny bit
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in fact the more you make that spread
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between short and long-term rates
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smaller
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which is what quantitative easing tends
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to do as central banks
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use
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their credit to buy bonds pushing up the
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price
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and down long-term interest rates
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inherently as you push the price of
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bonds up long-term interest rates go
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down you know that
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they reduce that spread and
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disincentivize banks from lending and
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the more they disincentivize banks from
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lending this is supply-side thinking the
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more banks don't lend when banks don't
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lend it's not inflationary it doesn't
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create money
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it is not stimulative in fact it's the
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reverse of all those things the tapering
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that motivates the central bank in their
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mind to be less prone to try to keep
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interest rates low that is they're not
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going to put so much on the demand side
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in reciprocity actually
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buoys up the bank's supply-side tendency
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to lend
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and whenever quantitative easing has
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been tapered off in the past
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it's very bullish
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it's stimulative it's great for stocks
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it's just generally great
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so this thing that they fear is a false
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fear
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false fears are always bullish
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tapering to the extent they really do it
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will be a good thing for stocks for the
4:56
economy for lending
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it is just generally good all the way
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around and i've now after over a decade
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of this kind of given up on the notion
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that people will get this in their brain
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right they're going to keep thinking of
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it upside down and backwards but you as
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an investor should embrace the fear
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of
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tapering
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and not subject yourself to what some
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people would call a taper tantrum
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because there's nothing about tapering
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that's bad it's all good thank you very
5:26
much for listening to me today
5:28
subscribe to the fisher investment
5:30
youtube channel if you like what you've
5:32
seen click the bell to be notified as
5:34
soon as we publish new videos
5:42
[Music]
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you

 

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