Throw A Dart
QE Distorts Financial Asset Prices.
Therefore, we will truly not know the Real Price of Any Financial Asset until QE is Completely Withdrawn.
The Withdrawal, however, Appears To Be Increasingly Unlikely…As The Narrowing Goal-Posts For Removal Are Also Continually Shifted…Proving To Be An Almost Impossible Economic Execution…As Designed/Desired By Global Central Banks.
Nevertheless, in the absence of QE almost all Financial Asset Prices [Equities + Corporate Bonds + Sovereign Debt etc] Ought To Be Lower…for a variety of reasons…particularly since Global Central Banks Have Manipulated Prices [via Acquisition] For 8+ Years…in concert with suppressed interest rates…to specifically effect Capital Markets Decision + Valuation Models [Qualitative + Quantitative].
For Example…Take A Look The Monthly SPY Chart Below.
The Magnitude Of Absolute Advance/Maximum Draw-Down [from March ’09 Lows] = Staggering = 265%/20.43% = 12.97x [ex: dividends].
Referring to Equities As Risk Assets…During This Time Frame = Grossly Inaccurate.
And Let’s Be Clear…QE = Assets Purchased By A Central Bank With Freshly Created Currency = Ultimate Monetary Power.
With So Much Power = You Could Ask…Has That Power Been Judiciously Utilized…Or Recklessly Utilized?
The Answer Might Be = Is The Virtual Elimination Of Equity Risk/Volatility A Charge For Central Banks…Or Just A Convenient/Intended Result?
It seems that Rather Than Providing Temporary Monetary Relief…QE Has Morphed Into Permanent Monetary Intimidation + Price Setting.
How Ironic That A Global Risk Based Market [Securities + Derivatives] = Valued At 575 Trillion [.575 Quadrillion] Could Be Primarily Manipulated By A Mere $18T+…That’s “A Lot Of Bang For The Buck/Euro/Swiss Franc/Pound/Yen/Yuan”.
To Borrow A Phrase From ECB Chief Draghi…Is $18T+ Of Global Central Bank Stimulus “What It Takes?” Or Is More Required and, if so, What Are The Specific Quantitative Limits/Parameters For QE?
It seems we will likely never receive specific responses because 1. The Questions = Never Asked + 2. The Answers Never Voluntarily Disclosed.
The Likely Answer = There Are No Limitations. Because To Central Bankers…Limitations = Risk [Career + Economic]. And based on the SPY Chart above…They Don’t Like Risk.
To them it seems…A Printing Press Eliminates All Risk and Assures That Success Is The ONLY Option…No Matter How Much Is Printed or How Long “It Takes.”
But then…What If QE Does Not Work…Beyond Propping Up Asset Prices?
Because given all the economic stimulus since ’09…global growth = barely pedestrian…even with the benefits of a cyclical turn in the economy.
What actually happens if Economic Failure [a lengthy period of contracting/negative GDP] Occurs…Even When It Is Not An Option? Because just because Central Bankers Do Not Consider It As An Option Does Not Mean It May Not Occur.
We’ll Only Know If/When They Stop Printing + Buying + Price Distorting.
And while Distorting Asset Prices is extremely controversial and problematic it also creates another very large problem…that is…
How To Make Informed Monetary Policy Decisions Relying On Economic Data That Is, In Many Ways, Necessarily Reflective Of Price Distorted Assets?
For example, it is frequently cited that the U.S. Treasury Yield Curve, though currently sagging, is still positively sloped…and that is a good sign for the U.S. economy.
In actuality the Federal Reserve has been manipulating the Yield Curve’s shape for many years.
Only with The Federal Reserve’s removal from the fixed income market will we know the True Shape of the Yield Curve.
Still…U.S. Central Bankers frequently jawbone that removing QE will NOT have a tremendously deleterious impact on Asset Prices.
That Belief = “Pipe-Dream”…of which most market professionals are well aware….no matter how Slowly QE = Withdrawn.
The Fed Cannot Have It Both Ways. Boosting Asset Prices with QE and then expecting that QE’s Removal Will Not Weigh on Asset Prices.
However The Most Current, Self-Described, Dilemma Facing Central Banks = “Traditional” Inflation Measures have not been especially responsive to lower interest rates + QE…since 2008.
And Stimulating Inflation = One of The Primary Goals Of Easy Money + QE.
Why Is That?
Because without it the economy will grow at a much lower pace or even contract …which to Central Bankers = Nightmare Scenario.
So while Central Banks have essentially failed in stoking “Traditional” Inflation measures, such as Wages + Commodities, they’ve succeeded in Massively Inflating Financial Asset Prices…Which [despite owned by 50% of U.S. Households…either directly/indirectly] Are Not Considered Legitimate Inflation Metric.
Perhaps they ought to…as the Combined Value of U.S. Equities + Corporate Bond Market is a quite significant portion of the U.S. economy?
For example…Publicly Traded U.S. Equities are currently valued at 157% of Calendar ’16 U.S. GDP.
Furthermore, after almost one decade of interest rates at/about the zero bound and with unemployment seemingly near its bottom, if this is all the “Traditional” Inflation that can be generated [which is still stubbornly below the Federal Reserve’s target of 2%] …it is difficult to envision a sharp step-up from current levels.
And it is Clear That The Fed’s Board Members Are Frustrated With This Shortfall. Yet They Still Robotically Apply The Same Salve To This Not Mended Financial Wound…Mistakenly Expecting A Different Result.
Then how to equivocate between Dormant “Traditional” Inflation Measures & Active Financial Asset Price Inflation?
Suppose The Following = The Transmission Mechanism Between Lower Interest Rates and Traditional Inflation Measures…Is Not Only Failing But, Paradoxically, Has Contributed to Lower “Traditional” Inflation Via Mal-Investment…Sustaining Inefficient Providers of Goods + Services…especially when combined with technology innovations wringing out excess costs from business operations…allowing for product/service price declines to approximate cost cuts.
In Contrast…If Asset Prices Were Included In A Blended Inflation Measure With “Traditional” Metrics [perhaps weighted as to their per/capita impact]…then the current regime of exceedingly low interest rates = A Significant Monetary Policy Error…As Inflation Would Likely Be Well Beyond Their 2% Target.
Fueling Already “Inflated” Asset Prices With Even More Combustibles [Due To Dated Economic Measures]…Rather Than The Sharp Reduction Most Likely Warranted Could Prompt Another U.S. Economic Shock Similar To Both ’00 & ’08 [both ushered in by too easy Federal Reserve Monetary Policy].
It is, at the Very Least, a Risk to be Seriously Considered.