Garner and Cramer discuss Quantitative Easing and Commodities, Treasuries, Stocks

QE operations have a positive impact on the money supply within an economy, which then tends to put upward pressure on assets prices of all types. Commodity Broker, Carley Garner, provides insight on what 2022 might bring for commodities.

 

Prior to the 2008 financial crisis, the use of Quantitative Easing was considered unconventional. It was a last resort policy that could only be justified as a means to avoid complete economic devastation. At the time, few were aware this policy tool existed and was an option for Central Banks. I recall Googling the foreign concept because despite being fresh out of college with degrees in finance and accounting, I had never heard the term. If you haven’t already done the same, here is the formal definition: Quantitative easing is a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets (municipal bonds, mortgage-backed securities, corporate bonds, and even stocks) to inject money into the economy and expand economic activity. As we learned during the Covid crisis, purchasing corporate bonds acted as a market stability tool because it instilled confidence in investors. Some refer to this as the “Fed Put” option.


Since initially pulling the ripcord, Quantitative Easing has mostly been a part of everyday life for the Federal Government (there was a pause of the operation between 2014 and 2020 but monetary policy was overall accommodating during that time). I am not here to debate whether the policy is right or wrong, just to point out the impact the practice has had on asset prices and whether that trend continues.


Aggressive stimulus enacted to avoid harsh economic cycles has resulted in a significant increase in the supply of money. While the concept of quantitative easing and other stimulus programs are complex, the simplest explanation is the more money there is floating around, the higher asset prices tend to be. More specifically, a higher money supply tends to open the door for potential runaway asset prices.

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