Viewpoint: Ending QE is bullish

I'm going to say something here you won't read anywhere else. Ending quantitative easing (QE) won't be bearish as everyone believes. It will be hugely bullish. I say this, knowing I won't convince any of you. Yet, this is the easiest thing in the world to see.

The world is unanimously wrong in fearing the end of the US Federal Reserve's QE, and most people just believe what they hear from everyone else and won't think things through for themselves. Global headlines scream that ending QE will be disastrous. No one says the reverse. No one even thinks to question it. That makes ending QE even more bullish - most expect Armageddon, and fear of a false factor is always bullish.

Think this through: governments don't print money. They control the banking system. The only way money supply goes up is if the banking system makes net new loans. And everyone wants banks to lend more - correctly seeing increased lending as positive.

But banks aren't interested in lending now. Central bankers can't seem to figure out why, but you can. Think this through: how do you get banks to want to lend more?

Banks' core business is short-term borrowing through deposits and making long-term loans. Everyone knows this. The bigger the spread between short- and long- term rates, the bigger banks' potential profits on the next loans they make, the more eager they are to lend. This is why in every developed country, the yield spread is an official leading economic indicator - the bigger the spread, the better. Huge spread - bullish. Tiny spread - bearish.

This is easy: if you want banks to lend more, you should steepen the yield curve. Major central banks now have short-term rates fixed very low - in the US near 0%. Via QE, they're buying long-term bonds. Remember from your first economics textbook - when a central bank buys bonds, it pushes bond prices up and bond yields down. Central banks are flattening the yield curve. On purpose! QE hurts, it doesn't help.

Stopping QE would let long-term interest rates rise - widening the spread between short and long rates and increasing the profit potential for the banking system. That will make banks want to lend more. Simple.

There's no other way to see this. Anything that increases bank eagerness to lend is stimulative. Anything discouraging it is contractionary and deflationary. Stopping QE will be bullish. Everyone fears the end of QE - instead they should be amazed the world has grown with such contractionary monetary policy. The global economy is amazingly resilient - just watch what happens when QE ends. More amazing - this is simple, Econ 101 stuff! Easy to see. Yet no one does, preferring the myth.

Stopping QE will be doubly bullish. Letting long-term rates rise will increase bank eagerness to lend - expansionary and bullish. But people fear ending QE when they should cheer it - when the world doesn't implode as most expect, that will be an additional, super-bullish factor.

In a world where everyone expects the worst, try stocks like these, both Canadian.

Thomson Reuters is a big player in financial data, but is it a Canadian company or an American one? Depends on whom you ask. Although headquartered in Manhattan, Canadians call it Canadian, being majority owned by the Thomson family's Woodbridge Co. of Canada.

The company spans 100 countries, with 60,000 employees providing vital info and data to firms and decision makers everywhere. It's the closest thing that trades on a stock exchange to Michael Bloomberg's monster money machine. Thomson is also cheaper than most competitors at 13 times my 2013 earnings estimate. It has a 3.8 % dividend yield.

TransCanada has had a nice recent run, but the stock should go further. It's a major beneficiary of the natural gas boom. You know it as the company with the Keystone Pipeline, but it's more than that: it connects every major North American gas basin with storage capacity and power-generation capacity. It sells at 18 times my 2013 earnings estimate with a 3.9 % dividend yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.