The more I think about it, the more impressed I become with the Fed’s timing to end quantitative easing (QE).  When they ended QE1, the stock market dropped scarily, and the Fed quickly resumed quantitative easing with QE2.  The stock market soared.  When they ended QE2, the stock market took another ugly spill, and the Fed felt forced to resume quantitative easing once again with QE3.  Again, the stock market soared, suggesting to some that the stock market had become dependent on the liquidity afforded by quantitative easing.

However, I am convinced the Fed wants out of quantitative easing permanently and does not want to conduct QE4.  So, when should the Fed get out of QE3 without upsetting the stock market?

The months of November, December, and January are historically the best months for the stock market.  So, ending quantitative easing just as the best three months for the stock market begin makes a lot of sense.  But, what else?

As mentioned in an earlier blog, the new liquidity rules for money-center banks require enough immediately-liquid securities be held to cover 90-days of operation, which increases the demand for Treasury bonds by money-center banks at the same time that the Fed is buying less.  (A special exception also included mortgage-backed securities within the definition of immediately-liquid.)  The result is that liquidity in the marketplace should not be reduced with Fed’s reduced purchase of Treasury bonds.

Last week, the European Central Bank quietly announced that the large banks of Europe would have to hold a full-year of operating cash in the form of immediately-liquid securities, which further increases the demand for U.S. Treasury bonds.  This virtually assures stock markets worldwide will continue to have plenty of liquidity.

Yes, it is possible all these events are mere coincidence, but I don’t believe that for a second.  Maybe, not everything that happens in backrooms is bad?