The latest round of quantitative easing has cheered everyone up, says Michael Wilson. Well, almost everyone…
Aaah, how the passage of time changes our perceptions. Only two years ago, when Fed chairman Ben Bernanke first mooted the idea of quantitative easing, the airwaves were superheating with experts protesting about how the central bank was dead set on wrecking not just the US economy with its money-printing machine, but also the stability of the dollar itself.
The Fed’s $600 billion bond buy-back programme, it was said, would send dollar deposits barrelling away into the already-overheated stock markets of Asia and Latin America, where they would wreak chaos and destruction. Have you seen any of that happening? Funny, no, nor have I.
Last night, as Mr Bernanke announced what amounts to QE3 with an open-ended pledge to pump another $40bn a month into the system, it wasn’t just the S&P 500 which soared by 1.5%. Or even the Chinese and East Asian indices, which saw the ASX up 1.2% and the Hang Seng rising by a staggering 2.9%. This morning the Footsie, the Dax and the CAC 40 are all up by around 1.5%, and the papers are talking about something they now joyfully call the Bernanke Bounce.
For old time’s sake, cast your mind back two years, to when Jim Rogers, the hugely successful co-founder of George Soros’s Quantum Fund, declared:
“Dr Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance. All he understands is printing money…..His whole intellectual career has been based on the study of printing money. Give the guy a printing press, he’s going to run it as fast as he can.”
Meanwhile the Tea Party (remember them?) protested:
“The Fed hopes that [quantitative easing] may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses. But if that doesn’t work, what do we do then? Print even more money? What’s the end game here? Eventually – inevitably – no one will want to buy our debt anymore. What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?”
24 months later, the answers are right there. US bonds are on yields of 1.5%, and there are no shortages of buyers. Economic growth are jobs aren’t great, but they’re better than much of Europe. Profits are set to soar. Armageddon has been postponed.
Still, you’ll be glad to know that there’s one person who still thinks QE is a one-way ticket to hell. Pimco’s Bill Gross has been back on the warpath this autumn with his claim that the Fed’s new enthusiasm for printing money is going to kill the “cult of equity” and show it for the Ponzi scheme that it really is:
“The age of credit expansion which led to double-digit portfolio returns is over,” he wrote in his latest investment outlook. Instead, “the age of inflation is upon us – which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.”
The credit expansion, he says, has done little for job, little for growth, and has destabilised the investment economy. Consequently, QE3 has little chance of delivering anything more than disappointing results. And equity investors will do well to scale down their expectations of returns to just 3% or 4% a year. Buy gold, because you’re going to need it soon.
Coming in a year when the S&P has put on 14% – including 10% plus since late May – that takes a little swallowing. Of course, the pessimists may be right that the presidential election campaign is driving down all considerations of economic problems ahead, and that the ugly truth may not rear its head until either Mitt Romney or Barack Obama is securely in his seat. But on the evidence we’ve seen this week, the markets think QE3 is not just a good thing but a source of hope – perhaps the only source of hope – that still remains.
“When Europe catches a cold, the US gets the antivirals.” - Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment, comments:
“Once again the Fed has upstaged the ECB with powerful and open ended easing program aimed right at the core of the problem – housing finance. Ben Bernanke is the world expert on what the Fed should have done to get out of the Great Depression and he is following the playbook to the line. Ease aggressively, don’t reverse course and keep the easing going well into the recovery.
“Today’s actions support our long-standing overweight of US equities versus Europe and of global property. As for overall market levels, we may see a period of consolidation as those who bought the well-flagged rumour sell the news. We’re hopeful this ease will help trigger a new economic upswing but these things don’t happen overnight. Soft economic data could create some good buying opportunities in the next few months.”
Tags: aaah | asian indices | ben bernanke | cac 40 | chaos and destruction | dollar deposits | fed chairman | footsie | george soros | hang seng | jim rogers | michael wilson | money printing | printing machine | printing money | quantum fund | s 600 | stock markets | tea party | time changes