It’s been a tough couple years for the Federal Reserve. After launching their biggest and broadest monetary stimulus campaign in modern history, the Fed is now ready to withdraw support from the U.S. economy. Although such a decision was expected, the financial markets moved in every direction but up this week and naturally investors are concerned.
In order to truly understand and appreciate the current state of the stock market, specifically North America markets, I thought I would kick off 2022 with a crash course (no pun intended) on what is quantitative easing and why buying the latest dips in stock prices could be the best investment decision you make in the new year.
Method of Measuring Economic Growth
Let’s start with the basics.
Money is vital to any modern economy since we no longer barter anymore. I don’t swap my advisory services for a piece of chocolate so having a means of exchange helps us price goods and services more efficiently. Simply put, money is a means of exchange and a method of measuring economic growth of our economies.
Mo money, mo problems?
Today, life suddenly seems more expensive especially when you’re buying food for your family or fuel for your cars. As a result of increasing the money supply, we are seeing higher inflation today. Yes, more money is a contributing factor to higher prices on goods and services but so are supply chain disruptions, chip and labor shortages.
2020 to 2021 – Quantitative Easing (QE)
Quantitative easing is when a government’s banker, in this example I’m talking about the United States and the Federal Reserve, attempts to stimulate economic growth either by reducing interest rates, buying assets or both. In other words, make it easier for consumers and companies to spend money in the economy.
As the Fed creates money to buy treasuries and mortgage-backed securities, it increases the supply of bank reserves in the financial system. The hope, is that lenders go on to pass that liquidity along as credit to companies and households, sparking growth in the economy. The downside is that just because the Fed pumps the economy with liquidity does not guarantee that companies or individuals will spend the money. If all parties refuse to spend the money and slow down the velocity of money moving around in the economy, negative side effects can include higher inflation and devaluation of the currency.
Is QE working?
In my opinion, I believe QE performed as expected and my back up to this opinion is based on the chip shortage. Semiconductors are an essential component of many products including electronic devices, enabling advances in communications-computing, healthcare, military systems, transportation, clean energy and countless other applications.
Since the supply of semiconductors (Chips) is obviously not aligned with our demand for the product, one could conclude that consumers and companies are spending the liquidity that has been created by QE efforts.
2022 to ? – Quantitative Tightening (QT)
QE is when the central bank floods money into an economy to stimulate it, but Quantitative Tightening (QT) policy would be exactly what you think, the direct opposite. This means less liquidity in circulation which may reduce economic activity and lead growth rates down over time if not corrected with expansionary monetary policies such as raising interest rates. Since the Fed announced their intention to introduce QT and possibly increase interest rates 3 times in 2022, stocks now find themselves competing with risk-free assets. Hence, the uncertainty and high volatility in the markets.
Investment Strategy – Ad Hoc Buying Style for Growth Focused Investors
If the so-called printing press of money is about to be turned off and interest rates are expected to increase within an unknown speed and schedule, what do you do?
Simple, load up on cash within your portfolio. This means depositing new money in your RRSP, TFSA or cash accounts and holding that cash so that you have means to deploy capital when the opportunity is right.
Next step, apply an ad hoc approach where you buy the price dips of companies you want to own for the next 10 years. I use 10 years as a holding period because I want your list of companies to be small. In my opinion, only companies that domicile in long term growth industries and that have high margins should be on that list.
For growth focused investors, a lower U.S. dollar can also be attractive for new investors who buy U.S. priced stocks and less attractive if you already own them and you’re thinking about rebalancing your portfolio back to Canadian dollars.
Just make sure you first consider your appetite for risk before investing.
Dollar Cost Averaging
You could set a monthly fixed deposit amount also known as dollar cost averaging however, I believe having a lump sum amount of cash is more ideal in this type of price discovery market.
What is this week’s takeaway?
When you invest your money, it’s important to know the basics of how economies work. If economic factors influence central banks and investors have no control over these factors, the best moves to make should be based on your personal situation and not the economy.
If you have the means to invest more capital, than invest more capital into companies you want to own for the next 10 years.
Have a great weekend!
Talk soon,
Michael
Quitting on Quantitative Easing
It’s been a tough couple years for the Federal Reserve. After launching their biggest and broadest monetary stimulus campaign in modern history, the Fed is now ready to withdraw support from the U.S. economy. Although such a decision was expected, the financial markets moved in every direction but up this week and naturally investors are concerned.
In order to truly understand and appreciate the current state of the stock market, specifically North America markets, I thought I would kick off 2022 with a crash course (no pun intended) on what is quantitative easing and why buying the latest dips in stock prices could be the best investment decision you make in the new year.
Method of Measuring Economic Growth
Let’s start with the basics.
Money is vital to any modern economy since we no longer barter anymore. I don’t swap my advisory services for a piece of chocolate so having a means of exchange helps us price goods and services more efficiently. Simply put, money is a means of exchange and a method of measuring economic growth of our economies.
Mo money, mo problems?
Today, life suddenly seems more expensive especially when you’re buying food for your family or fuel for your cars. As a result of increasing the money supply, we are seeing higher inflation today. Yes, more money is a contributing factor to higher prices on goods and services but so are supply chain disruptions, chip and labor shortages.
2020 to 2021 – Quantitative Easing (QE)
Quantitative easing is when a government’s banker, in this example I’m talking about the United States and the Federal Reserve, attempts to stimulate economic growth either by reducing interest rates, buying assets or both. In other words, make it easier for consumers and companies to spend money in the economy.
As the Fed creates money to buy treasuries and mortgage-backed securities, it increases the supply of bank reserves in the financial system. The hope, is that lenders go on to pass that liquidity along as credit to companies and households, sparking growth in the economy. The downside is that just because the Fed pumps the economy with liquidity does not guarantee that companies or individuals will spend the money. If all parties refuse to spend the money and slow down the velocity of money moving around in the economy, negative side effects can include higher inflation and devaluation of the currency.
Is QE working?
In my opinion, I believe QE performed as expected and my back up to this opinion is based on the chip shortage. Semiconductors are an essential component of many products including electronic devices, enabling advances in communications-computing, healthcare, military systems, transportation, clean energy and countless other applications.
Since the supply of semiconductors (Chips) is obviously not aligned with our demand for the product, one could conclude that consumers and companies are spending the liquidity that has been created by QE efforts.
2022 to ? – Quantitative Tightening (QT)
QE is when the central bank floods money into an economy to stimulate it, but Quantitative Tightening (QT) policy would be exactly what you think, the direct opposite. This means less liquidity in circulation which may reduce economic activity and lead growth rates down over time if not corrected with expansionary monetary policies such as raising interest rates. Since the Fed announced their intention to introduce QT and possibly increase interest rates 3 times in 2022, stocks now find themselves competing with risk-free assets. Hence, the uncertainty and high volatility in the markets.
Investment Strategy – Ad Hoc Buying Style for Growth Focused Investors
If the so-called printing press of money is about to be turned off and interest rates are expected to increase within an unknown speed and schedule, what do you do?
Simple, load up on cash within your portfolio. This means depositing new money in your RRSP, TFSA or cash accounts and holding that cash so that you have means to deploy capital when the opportunity is right.
Next step, apply an ad hoc approach where you buy the price dips of companies you want to own for the next 10 years. I use 10 years as a holding period because I want your list of companies to be small. In my opinion, only companies that domicile in long term growth industries and that have high margins should be on that list.
For growth focused investors, a lower U.S. dollar can also be attractive for new investors who buy U.S. priced stocks and less attractive if you already own them and you’re thinking about rebalancing your portfolio back to Canadian dollars.
Just make sure you first consider your appetite for risk before investing.
Dollar Cost Averaging
You could set a monthly fixed deposit amount also known as dollar cost averaging however, I believe having a lump sum amount of cash is more ideal in this type of price discovery market.
What is this week’s takeaway?
When you invest your money, it’s important to know the basics of how economies work. If economic factors influence central banks and investors have no control over these factors, the best moves to make should be based on your personal situation and not the economy.
If you have the means to invest more capital, than invest more capital into companies you want to own for the next 10 years.
Have a great weekend!
Talk soon,
Michael
Share This Post