Does the End of Quantitative Easing Mean the Beginning of a US Equity Boom?


Will Fed tightening drive the dollar higher, especially given slower growth in other global economies?  And will this lead to a flight to US equites?  That is the thesis of an article  by Madrid-based senior editor for MarketWatch, Barbara Kollmeyer.  She also writes that it is worth holding on to US equities this summer, in spite of trade tensions. 

We’ve asked EconVue contributors to respond to this forecast of US dollar and equity strength. 

Panel Discussion

Robert Shapiro
Robert Shapiro EXPERT

There’s too much pure speculation and not enough economics in this piece.  Of course, rising U.S. interest rates are normally accompanied by a strengthening dollar.  But the effect on the U.S. stock market depends on many other conditions.  Do the rising interest rates portend a looming end to the U.S. business cycle?  If so, foreign investors are more likely to turn bearish then bullish.  A stronger dollar against the Euro and Yen also means that foreign investors have to pay more Euros or Yen to buy a dollar’s worth of U.S. stock, so a positive impact on the U.S. stock market depends on the relative dimensions of the rise in U.S. returns and the rise in the dollar’s exchange value against the Euro or Yen.

Certain conditions certainly can drive up both the dollar and foreign investment in U.S. markets – for example, serious problems with the Euro; a regional crisis that makes global investors uneasy about European, Asian or Latin American economies; and out-of-sync business cycles, so other advanced economies weaken as the U.S. strengthens.  The resurgence of serious political and economic problems in Italy could lead to a sovereign debt crisis there that would endanger the Eurozone and its banking system.  That would certainly trigger capital flight to the U.S.  But that scenario is more likely txo not come to pass; and if it does, our banking system will be caught up in the undertow soon enough.  A regional crisis in the Middle East or the Korean peninsula is always possible, and on balance more so under the Trump administration – but again I wouldn’t advise playing the S&P futures market based on the possibility.  As for relative business cycles, ours seem more likely to weaken before Europe’s than the converse.  Incidentally, if foreign demand for dollars to pay interest on dollar-denominated debt abroad is as large as the writer claims, the U.S. Treasury still pays foreign owners of U.S. debt a lot more dollars in interest, and much of it quickly flows back home.

Karim Pakravan EXPERT

"Johnson’s premise is that U.S. monetary policy will cause a shortage of dollar liquidity, in combination with a strengthening dollar. In turn, this will cause a global currency crisis, which would then lead to a surge of capital flows to the United States in search of safety. It is true that emerging markets are the ones that could be the most hard hit by the double whammy a strong dollar and higher U.S interest rates.  Emerging market sovereign and corporate debt is estimated at $8.3 trillion, of which 75% is dollar-denominated.  

However, there are several arguments against Johnson’s view.  First, strong U.S. growth will lead to a widening of the U.S. current account deficits, putting pressure on the dollar. Second, emerging markets are in a much stronger financial position, and can counter the impact of as stronger dollar, which means that we are unlikely to see a global currency crisis.  Third. eventually, other major countries will tighten their monetary policy too.  Finally, betting own a global currency crisis without looking at its impact on the U.S economy seems to be a counterintuitive argument for dollar strength,  Moreover, in the longer term, the unilateral moves by the United States to impose secondary sanctions on other countries and restrict access to the dollar payments system will accelerate the development of alternatives (both euro- and yuan-based), challenging the dollar supremacy."

Robert Madsen EXPERT

Johnson’s vision of the future is certainly possible.  The Fed’s tightening could trigger a global crisis, dollar appreciation, an inflow of foreign capital into US markets, and a surge in asset prices over the next couple of years.  It seems at least equally probable, however, that the administration’s mistaken economic policies will trigger a trade war and wipe out considerable stockmarket value.  There are, in other words, crisis scenarios in which American markets do not rally sharply—or at all.

Let’s assume for the moment, however, that Johnson’s prediction is correct and an unexpected influx of foreign capital drives up US asset prices over the medium term.  Would that be good for the United States as opposed to wealthy Americans?  In some important ways it would not.  For the loss of liquidity around the world would vitiate demand for US exports even as the prices of those exports rose.  American manufacturers and workers would be worse off in terms of both employment and wages.   Thus the distribution of income and wealth would grow even more inequitable and the popular anger that has proved such a potent force in US politics over the last decade intensify, inflicting deeper damage on social and political structures.  If that anger fueled greater skepticism regarding other countries and international institutions, as seems likely, the liberal international trade and financial order would suffer further erosion.  So while Johnson’s bullish prognostications might encourage financial firms and the broader services and technology sectors, they depend on trends that would be disadvantageous to the country as a whole.