Impact of QE on markets opposite of expected

Hi Ashley, I’m pleased you mentioned deflation, as you rightly point out, that was the key fear at the time. Whilst I’m certainly no expert, it seems to me if you view the results whilst looking through deflation glasses the results make more sense. US house prices had already deflated 30-50% depending on the state, so deflation was a real concern. In my view the QE money printing simply offset the deflationary pressures already in motion. This would explain why the popular financial media expectations did not eventuate (hyperinflation etc). As example, if bond yields are so low (due to Feds massive monthly purchases) there is almost no income derived then surely a logical expectation is investors will purchase income producing assets such as shares and the price for those shares will rise over time due demand. If the US economy was in a deflationary dive you would expect the US dollar to improve in value as it becomes worth more relative to other assets, especially given other countries were also actively depressing their currencies as well.

I’m not a fan of QE and as you say the jury is still out as to its longer term consequences, but I do think it worked as the Fed expected, it just wasn’t as the popular media expected.

Hi kevin
yes QE countered defaltionary forces. But falling house prices are not widely regarded as deflation , merely a correction from a bubble. Deflation forces came from huge excess capacity - human capacity (high unemployment), factory capacity, etc caused by the dramatic collapse in domestic and global demand.
But deflation was not a widely held fear. CPI inflation was running at 3% and 4%, the germans were running a scare campaign warning of 1923-style hyperinflation (they still are!), ATMs selling gold bars sprang up on the streets of Europe, and even the normally pro-inflation IMF advocated fiscal tightening.
The US also acted quickly to recapitalise banks but Europe is still in denial. Europe will be asleep for many years then it will just die of old age. The US has relatively good demographics (as has Australia) and this also helped in the recovery

Yes I guess a US housing bubble collapse is a fair explanation and deflation by definition is prolonged negative CPI, but could you not also argue that the Feds QE pumped things up enough to counter what would otherwise have been prolonged negative CPI? I'd be interested in your view.

yes, deflation was the far more serious threat than inflation, although the inflation/gold bugs caught overwhelming bulk of public and media attention at the time. History will show that Bernanke was right and Greenspan wrong (although he was almost universally hailed as a god when he was in power).
Deflation should be a good thing - everybody likes paying lower prices! But if people expect lower prices next year they stop spending this year, and that stops production, investment and employment. It creates a negative spiral that requires a major shock (like an all-consuming war effort like WW2 followed by a baby boom and reconstruction boom) to break out of the spiral.
The other big difference between US and Europe is Europe's crippling extra layers of government and regulation, including and especially labour laws, welfare/pension entitlements and industry protection. It will take a lot more than money-printing by the ECB to get Europe out of its problems. So European QE (if it ever does occur it will be too late and too small) will be necessary but probably not sufficient to generate enough demand growth to restore full employment.
I don't make value judgements about whether policy actions like QE are good or bad, my main focus is on understanding impacts on investment markets and positioning portfolios to miminise losses and maximise gains.