December 7, 2015

World wide QE will end badly

The Federal Reserve and the world's other central bankers have long been encouraging asset bubbles and higher stock prices through easy monetary policy. 

This always ends with a very bad hangover. Pushing stock prices ever higher should never substitute for prudent monetary policy and/or responsible fiscal policy.

In the early stages of the central banks' easy-money policies (2008-2011), we needed more and more "cowbell" to avoid a "double-dip" recession. But now, it's inevitably leading to "malinvestment," sustaining companies that shouldn't be sustained and causing asset-price overvaluation. Using too much cowbell for too long can be hazardous to our investment health, as we've lost all sense of price discovery and "normalcy of policy."

Columnist Richard Breslow vividly observed this state of investment affairs in a rant (as quoted by ZeroHedge):

    "In the history of tightening cycles, we've never had a Fed so intent on hammering home the message that if anything goes wrong they will be quick to respond, backtrack and ensure financial stability (a term that has become a sorry euphemism for propping up stocks).

    What is meant to soothe should be having the opposite effect. In a 'normal' world, a rate hike is meant to cool off the economy. In this case, it is equally motivated by the imperative to make monetary policy functional again. Does anyone seriously think they are worried about inflation getting out of control?

    Of greater concern is that the focus on asset prices at the expense of the real economy has desensitized markets from rationally (or even at all) responding to geopolitical events. When bad or dangerous events occur, the weight of the consequences is borne solely by the non-financial community. Here we go again.

    All global events have been reduced to monetary-policy events, i.e., buy-the-dip opportunities. France's CAC-40 sold off the two trading days before the recent horror. It was a solid buy the following Monday.

    By always protecting risk-takers, the authorities are complicit in trivializing issues that need an all-hands-on-deck response. 'Bad news is good news' has metastasized into an even baser concept.

    Raising rates will, hopefully, be a step in the right direction, but there is little that is normal as yet."

Valuations are elevated, with the ratio of market capitalization to GDP (Warren Buffett's favorite indicator) at a dangerous level. The market's fundamental and technical foundation are weak, but the S&P 500 is within 2% of all-time highs. Global economic growth is also wobbly, but few seem concerned.

Stated simply, the investment waters have grown unnatural, hostile and more difficult to navigate -- and it appears that what we've learned from history is that we haven't learned from history.

Baruch Spinoza put it well when he wrote: "If you want the present to be different from the past, study the past."