On September 13th, Federal Reserve Chairman Ben Bernanke announced a third round of quantitative easing (QE3), which came in the form of an open-ended commitment by the Fed to purchase $40 billion of mortgage debt per month until the job market improves. Public equities surged but we at CircleUp, an equity-based crowdfunding platform focused on consumer and retail companies, were equally excited. Why? Because we believe the Fed’s accommodative monetary policy significantly distorts both returns and risk in the public markets, the two opposing forces that any investor must consider when constructing her portfolio, and provides a great opportunity for investors to allocate a portion of their portfolio to private market assets like crowdfunding.
When the Fed pours money into the system with the purchase of mortgage-backed securities, combined with guidance from the Federal Open Market Committee that the federal funds rate will remain near zero at least through mid-2015, it depresses yields on debt instruments. In turn, investors pour money into public equities in search of returns they can no longer access in the debt markets. The value of a company should be based on the value of its future free cash flows discounted at its cost of capital. However, since the Fed is holding down interest rates and thus companies’ cost of capital, the discount rate to calculate the value of a company is artificially lower resulting in higher company values than might be implied by a company’s fundamentals.
To read the original article: Ben Bernanke's QE3: The Best Thing for Crowdfunding Since the JOBS Act - Forbes
