Qualitative Easing: An Economics Introduction

Written by: Kleiny (@KnowGoodThings)
June 8th, 2017

PROLOGUE:

For the better part of my adult life (even during my formative years as a bratty adolescent), I have been smitten by the study of economics. It’s a subject matter that fascinates me and I realize that such a statement is not “normal”. Well, neither am I. For those who know me (like the Justice Brothers, for example), they’ll likely agree without hesitation! What can I say? I am who I am, right?

I was approached a while back by Tackle Trading to gauge my interest in developing a “new kind of blog” for the website. As we discussed possible ideas, it was mentioned that maybe I could create a blog that focused on economics. Since I just happen to be a certified “armchair economist”, I perked up a bit and began playing around with the idea. What I came up is what you will hopefully see on a regular basis. My vision for this “econoblog” is to start at the very beginning and allow EVERYONE a chance to commence thinking about (and ultimately incorporating into their own trading routines) macroeconomics, which can be a rather convoluted! Combine the often complex and intimidating nature of economics along with the palpable observation that it’s likewise ubiquitous (especially relating to trading) and you’ve got the makings of something that will usually end up unnoticed or misunderstood by individuals. It is my goal to build upon each blog entry…brick upon brick…layer upon layer…until we eventually arrive at a point where we’re utilizing current data (events, dates, circumstances, statements, policy, political developments, etc…) and discussing it as it relates to the markets. I do not have a timetable, nor do I have a preconceived “table of contents” for the material I’ll write about on a weekly basis. It will simply flow from one week to the next…from one topic to the next…until I feel comfortable that we’ve successfully completed a solid foundation. Your feedback will also determine how this “econoblog” develops and I encourage any comments and feedback that you may have. I only ask for patience as you read from week to week…allow time for others to digest the material…and that you try your best to stay engaged and learn. For some, these initial blog entries will be review. For others, these initial blog entries will be completely new terrain. I’m excited to get things moving and look forward to helping you add a new skillset to your market analysis. Now that I’ve created an introduction to the introduction of this new “econoblog”, allow me to now be a bit more elaborate with the inaugural post and take the introduction a step further!

INTRODUCTION: Qualitative Easing…

For those paying attention, the title of this particular blog entry should sound kind of…sort of…somewhat familiar, right? After all, it was only a few short (and somewhat painful) years ago that we were inundated with the intentionally convoluted monetary policy of Quantitative Easing (QE). Few knew what it actually meant and even fewer seemed to care enough to find out! God bless America, right? Seriously. God bless us…please!

While it is not my intention to delve into the intricate details of the sneaky and manipulative Quantitative Easing policy right now, it very well may be something that I try to throw some disinfecting sunshine upon at some point in a future blog entry. For now, I want to focus on quality and basic fundamentals of macroeconomic analysis and then ease into a discussion on actual implementation…hence the name of this week’s blog: Qualitative Easing. Pretty clever, right?

Like almost every single one of you reading this, I have a strong desire to try and figure things out as best I can. I’m especially interested in the “cause and effect” relationship of economic policy in regards to the financial markets…as well as human behavior. It’s a fascinating area of study and appears to be seemingly endless in its application to the financial markets, too! It certainly can’t hurt to try and become more comfortable in your abilities to utilize macroeconomic analysis. At the very best, it will make you a more effective trader and at the very worst, it will make you a more informed citizen. Seems like a win-win scenario to me! Heaven forbid we become more smarter vis-à-vis the way things work and why things work the way they do, right? ☺

It should be stated here at the beginning that there are people out there (usually bombastic personalities on television, radio, print media, or the internet trying to make a name for themselves by making bold predictions based on specific sets of data) who insist that economic theory is the physics of the social sciences. While I can’t completely 100% disagree with such a sentiment, I do have to admit that there are some extreme differences between social sciences and physical/earth sciences. For example, it is much more difficult to predict human behavior based on incentives, risk, or demand than it is to predict the behavior of molecules or biological cells based on proximity to bacteria, trauma, or medicines. Human beings have proven to be highly unpredictable creatures from time to time! It especially baffles and befuddles economists when human beings react unexpectedly in response to circumstances that would seem to be extremely predictable. Such is the way of things in the world of economics. There just simply isn’t a boldly printed road map that one can point to as an absolute when it comes to predicting expected outcomes. What we do have, however, is access to theory, situations, and data that is entrenched with certain probabilities based on historical results and reactions. As traders and investors, this shouldn’t be something foreign to us because we’re used to making “odds-based decisions” and we usually hone in on certain trades that may not have a huge financial reward, but do provide us with a high probability of success. For everyone who enjoys selling short term put spreads with only a handful of days until expiration and a low delta, you know exactly what I’m talking about! Simply put, economics will never be tantamount to physics…yet we can still use economics as a very useful tool to help us be more informed, prepared, and successful.

My intention for this blog is simple. I want to discuss macroeconomic analysis, stimulus/fiscal/monetary policies, and even political maneuverings in an effort to help slow things down for you and allow you to begin making this largely ignored, forgotten, and misunderstood aspect of the markets a successful part of your daily trading routine. Just as one learns to ride a bicycle, we’ll begin with training wheels. I don’t want to leave anyone behind by starting somewhere that immediately intimidates or confuses them. I don’t intentionally want to frustrate the normal learning process…and besides, it kind of makes sense to start any new adventure at the beginning, you know? After the training wheels come off, we’ll ride slowly with the wind at first then continue onward in our velocity and progression until we’re all eventually riding Harley Davidson Fat Boys in full-blown leather jackets and Kevlar-coated pants on a cross-country cruise!

In the coming blog submissions, I plan on discussing the economic and market theories which shape our modern-day economy. It’s important to understand where we started, what we actually intended, and what we’ve ultimately ended up with in regards to our country’s economic system. There are a lot of myths and misnomers surrounding the cause and effect nature of macroeconomics, which I definitely plan on discussing. My current level of economic acumen stems from a lot of study (undergraduate, graduate, and at least twenty years of continuous ongoing personal intrigue), experience, successes, implementations, failures, and experimentation. I’ve always been fascinated by economics (which, I admit, isn’t normal) and have really tried hard to arrive at a high level of confidence when utilizing macroeconomic analysis as a stalwart and important aspect of my own trading endeavors. As a financial markets mentor (stocks, options, spreads, etc…), I have spent the past twelve years meeting and teaching students from all walks of life from sea to shining sea…all across the fruited plains…trying to help them achieve their trading goals. Macroeconomic analysis has ALWAYS been a part of my mentoring methods and I’ve yet to meet a student who felt like it was a waste of time. Today, I’m a bit pickier and more finicky about when I conduct a mentoring session because of other endeavors I’m currently engaged in, but when I do conduct a mentorship I still place a high level of emphasis on this subject matter!

While I’m not someone who could be professionally labeled as an actual “economist”, I do feel strongly that I’m absolutely someone who could be socially labeled as an “economics enthusiast”. Perhaps one could call me an “armchair economist”? While I’m very comfortable with my current level of understanding, I’m still not content. To be blunt, I don’t think I’ll ever feel completely content with my level of understanding (of macroeconomic analysis…and even trading in general) because I still feel like I’m learning and I have no problem admitting when I am wrong. I swallowed that bitter pill years ago (I highly encourage all of you to develop such a mindset; it’s okay to be wrong; you can count on being wrong…more so during your time as a “novice”…so you might as well just learn from being wrong and turn it into an asset instead of a liability) and have been much better off because of it. I do, however, have a problem with being wrong and not learning from it! So, let’s learn together! I promise to do my best to impart my experience and modest wisdom regarding this topic in order for YOU to increase your level of understanding so that you can add yet another successful analysis technique to your trading routine while on your way towards becoming the type of successful trader that you envision. The only thing I need from you is a willingness to learn and think critically.

To close, allow me to share something provocative and thought provoking regarding the sheer power of economics written by one of the fathers of modern economic theory, Mr. John Maynard Keynes (whom I tend to disagree with more than I agree, but that’s for a later blog): “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Be good. Do good. Know good.

Kleiny
Columbus, Indiana

@KnowGoodThings