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Additional Analysis and Insight … U.S. Equity Markets in 2011


Quantitative Easing by the Federal Reserve

The S&P500 Index and the total value of securities held outright by the Federal Reserve over the last 9 years has had a strong positive correlation.

See the Fed data at   http://www.federalreserve.gov/releases/h41/hist/h41hist3.txt.

The argument goes something like this … Some time this June, the Federal Reserve’s QE2 is targeted to end. From the before mentioned public data from the Fed,  U.S. Equity markets may well slow down based on the last 9 years of data correlating Fed monies pumped into the domestic economy and the domestic equity market performance.

It is possible ( maybe … maybe not ) that the Fed will keep everyone guessing as to specifically when the QE2 will end. Now why might the Fed ever do something like this ? Again, this is just a possibility, it may not happen. If I were on the Fed Board and in their proverbial shoes, I might do this for 2 main reasons. First of all, it’s usually nice to have some lee-way ( room for adjustments ) in your plans, especially when it concerns domestic and international financial market stability. Second … Giving the public ample notice that some adjustments might be made, can help better prepare them for future adjustments that may possibly ( but not necessarily ) be made. There have been rumors floated by member(s) of the Fed. Reserve, in addition to public rumors that QE2 might be ended early for fear of domestic inflation OR possibly even extended. Remember again this is all just conjecture. However, if I was on the Fed Board, I would use this second tactic / strategy to prevent any kind of possible, but unlikely mass exodus from U. S. equities during a brief window of time. If any type of exodus like this were ever to occur ( like the recent exodus from emerging market equities to U.S. equities ) it could possibly add to any instability in the global financial markets. Now no one would want something like that to happen, especial the U.S.  Federal Reserve.

We will see what happens.

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About Neven's Blog

My blog focuses on FINANCIAL MARKET ANALYSIS & INSIGHT from a macro as well as a micro - level point of view. The information is straight forward, honest, simplifies complex matters, questions some oversimplified matters, all while being as easy as possible for readers to understand. I primarily focus on capital and currency markets by combining insights, analysis & ideas from the fields of finance, economics and geopolitics.

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