Markets and QE

Following on from Friday's post, here is a piece at Project Syndicate which argues that the markets don't really understand QE and that stocks are actually cheap! The fallacy in this article is that as QE hasn't affected monetary growth, its ending will be a non-event. However, QE has affected asset markets as central banks have bought huge amounts of government bonds, which distorts yields on bonds and the real rate of interest. The ending of QE will drive bond yields and the real interest rate up. Increasing bond yields makes the bond market more attractive and, as a result, money flows out of the equity market. An increase in the real interest rate reduces the present value of future cash firms generated by companies, which can only lead to falling stock prices.

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