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Hints of the End of QE Have Traders Spooked

REITs are full of retail investors who could turn tail if QE tapers off


Well, the party couldn’t last forever.

On Friday night, the Wall Street Journal published an article  (paywall) that said the organization has mapped out a plan for winding down its quantitative easing program. The article said the Fed had plans to reduce the number of bonds purchased in “careful” and “halting” steps.

That was not exactly new information but it spooked people anyway because everyone who has been around Wall Street for a while knows that the Fed might make plans to depart from QE in a dignified way, but investors are likely to jump the gun and rush the exits. You have to understand that while the program has gone fairly well from the Fed’s point of view so far, it is still largely an experiment in monetary policy on an immense scale and no one really knows what the consequences will be or what the final phase might look like. Methods that might look good on paper in Fed analysts’ academic models could be seriously preempted by panicky human psychology.

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Already, we see that investors decided to sell the mortgage REITs first and ask questions later, and that should be viewed as just one example of how private investors will panic when they hear that the Fed is stepping away from QE. You see mortgage REITs such as American Capital Agency (NASDAQ:AGNC) at right that have a very simple business model. They borrow cheap and buy mortgages, and then pay out the difference as a dividend. It’s mostly retail investors in these things, and they tend to jump at the first sign of trouble. AGNC sank 3.3% yesterday, well below its 200-day average. It’s been muddling around those lows today as well.

That kind of drop has happened a few times before, in August and October in 2011 and November and December last year. This stock will probably rebound once some Fed officials hit the rubber-chicken circuit and financial TV shows to say that they are not planning a hasty retreat, but the reaction nevertheless shows how worried many investors are about the end to QE.

The fact is that QE will end, and must end, and if this is any indication, you can bet there will be a lot more volatility ahead than we can see back over our shoulders.

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Article printed from InvestorPlace Media,

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