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QE Not Working Out as Planned, but Hey, I'm Just a Caveman Economist

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The Fed and pundits are declaring QE victory based on employment and rising stock prices, but correlation does not mean causation.

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This is perhaps the most underappreciated economic development that equity market bulls and QE victors are ignoring. These economic growth rates can't handle rising real interest rates. Nevertheless the Fed and financial punditry are declaring QE victory based on employment and stock prices, yet it's obvious they don't even really understand how it works. If they don't know how it works how can they claim it's responsible for improving employment or higher stock prices? Correlation does not imply causation. Just because the Fed is buying bonds and stocks are rising doesn't mean the Fed's buying bonds is responsible for rising stocks.

Economists like Fed staffers, Paul Krugman, and Chairman Bernanke who subscribe to the stock theory must think a 30 basis point shift in the yield curve as the result of QE is statistically and economically significant. I'm not sure about that, but what I am sure is statistically and economically significant is a negative convexity blowout that pushes the curve 100 bps higher in months despite no change in policy.

But hey, I'm just a caveman. Their world frightens and confuses me. Sometimes I see the IS/LM curve and think, who is drawing these strange lines, and ask, what does it mean? I don't know. My primitive mind can't grasp these concepts. But there is one thing I do know: From the Fed, talk is cheap, and to the market the curve is steep. And at the end of the day, the only thing that matters is whether the market's balance sheet can withstand a convexity blowout of a few hundred beeps.

Twitter: @exantefactor
No positions in stocks mentioned.
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