Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Thursday, 19 September 2013

Fed Statement live - why it's important to stock market investors

Quantitative easing (or simply 'QE') has been the US response to the financial crisis since 2008. 

QE is designed to stimulate the economy and to 'shore up' the banks' capital by freeing them of their toxic mortgage securities and encouraging lending.

Commencing in 2008, the Federal Reserve has embarked upon buying trillions of dollars of Treasury bonds and mortgage-backed securities in order to stimulate the economy, at the risk of causing inflation.

Why is this important to stock market investors? The chart below, which is the S&P 500 explains why.


The first round of QE (QE1), which involved a massive expansion of the Fed's balance sheet from around $700 billion to more than $2 trillion, ran from November 2008 (Point A on the chart) to June 2010 (Point B). 

Note how the stock market first responded and then corrected when the stimulus was unwound in 2010.

With unemployment remaining stubbornly high and the economy slow to recover, the Federal Reserve proceeded with QE2 in November 2010 (Point C) which involved another $900 billion of stimulus - the Fed bought $600 billion of long-term Treasuries and re-invested a further $300 billion.

The stock market once again headed north until QE2 was unwound in June 2011 (Point D) which again resulted in a sharp correction.

In September 2011, the stimulus was extended (Point E) and the stock market has delighted equities investors by going on a strong bull run as the economic outlook has steadily improved.

It's clear that by increasing dollars in circulation the Federal Reserve impacted the economy - and the stock market's expectation of the economy - and asset valuations rose accordingly.

Today, we're expecting to hear that the Fed may finally 'taper' or trim back its QE3 bond-buying program.

Note that the market is expecting a taper of $10-20 billion so any announcement in that range is unlikely to de-stabilise the market, for this outcome has already been priced in. What markets don't like is uncertainty, so any surprises may be less favourably received.

On the other hand, the Fed may declare "no taper for now" which would instantly see stocks whipsaw upwards after a soft start to the day.

Stay tuned...