Tags: David Sterman | Stocks | Fed | QE

Market Expert David Sterman: Stocks Might Hit Major Rough Patch When Fed Ditches QE

By Dan Weil and Kathleen Walter   |   Wednesday, 20 Feb 2013 07:19 AM

The stock market could endure a major slide after the Federal Reserve halts its quantitative easing (QE), likely in June or July, says David Sterman, senior market analyst at StreetAuthority.com.

The Fed’s huge injection of liquidity is largely responsible for the stock market hitting five-year highs, Sterman tells Newsmax TV in an exclusive interview.

“All of the stuff that was done with the quantitative easing programs has injected so much – we’re talking $2 trillion – into all kinds of assets, including stocks,” Sterman says.

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“So what you’re seeing here at Dow 14,000 is not a reflection of the U.S. economy, it’s just a reflection of the money flows that tend to push the market higher,” Sterman says.

But when the Fed tightens its spigots, the story will change, Sterman says. “Then there’s no more fuel, and that’s why there are a number of people who think that the market is making its high for the year right now.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Once QE dries up, “you really do get a pretty serious wave of profit-taking,” Sterman says.

And all signals point to an end of QE at midyear. “There really is going to be no QE5,” he says. “There’s nothing else to be done. Even [Fed Chairman Ben] Bernanke has hinted that this is all the firepower he has.”

The $64,000 question is whether all this easing sparks nasty inflation, Sterman says. “This is a set of rules that have never been established before, and nobody has ever tried to sop up $2 trillion of a program like this,” he notes.

Rampant inflation is a possibility, Sterman says. “I’m not yet convinced that absolutely will happen, but certainly we’ll probably have to get a little lucky for this whole Fed program to unwind smoothly.”

Meanwhile, rating agencies have threatened the U.S. with a downgrade if it doesn’t get its fiscal house in order.

“The ratings agencies themselves are getting badmouthed, and that’s partially a way of the market trying to jawbone down any sort of response from a possible ratings downgrade, because it does appear that one will be coming,” Sterman says.

But he’s less concerned about a debt downgrade than an increase in interest rates as far as government debt goes. That’s because a rate increase could raise the government’s debt service costs astronomically.

“The average interest rate that they’re paying now is 2.3 percent, and when rates start to go up, the government is continually refinancing these trillions in debt and really can’t afford to be paying much higher interest rates,” Sterman says.

“That would wreck the economy.”

But the Fed is unlikely to raise rates before next year, he says.

Sterman isn’t overly concerned about the currency war that seems to be breaking out. Currency conflicts have arisen in the past, such as in the 1980s, he points out. “History has shown that when it starts to get out of control, you get the big global meeting, and it does snap back in line.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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