We subscribe to the “they are damned if they do and damned if they don’t” view of monetary policy. If the central planners do more meddling, the negative unintended consequences like continued snail-paced growth and social unrest will be the dominant factors. If they do less, the errors of their ways will become obvious more quickly. Nonetheless, when the Fed floats the idea of changing laws to allow it to openly buy equities in the “next” downturn like it suggested might be necessary in recent weeks, you know there’s a big problem. Markets are close to figuring that out.
The policy maker’s last “brilliant” scheme of negative rates is crushing bank earnings in Europe and Japan. Current QE strategies are crowding out traditional investors like insurance companies whose business models were based on a free market for bonds. Most of the deciders’ remaining choices like widespread and unmasked use of outright equity purchases by the central banks would be a more blatant crossing of the socialist Rubicon, but directionally and philosophically that is where they have been taking us anyway. On that front, Japan does not seem to be getting much bang for the equity QE buck, or should we say yen.
We really do wonder. Will the traditional socialist P-E multiple discounts apply like they used to when investors valued some non-U.S. markets in days gone by or will we all just pretend capitalism has not been completely strangled to death if our Fed began to openly buy stocks? Who will vote the proxies at the Fed? Regardless, if the monetary despots become less involved, volatility will erupt sooner rather than later because the markets depend on their horrible drugs of easy money and soothing chatter. However, capitalism with all of its many strengths and a few weaknesses would come to the fore if the manipulation ceased. That would be good. In the end, volatility will be going higher anyway as the effects of continued quasi-recessionary growth lead to diminished corporate cash flows.
The powers that be are pedaling furiously on an economic bike that is virtually stationary. We think it is important to remember just how much fiat money is being conjured just to keep the current increasingly distrusted order in place. Stocks have been stuck in the same range for about two years despite the ECB, the BOJ and other central banks now pumping nearly $200 billion per month into the global system.
China has done its part for the establishment cause by reversing course on promised lending reforms when things started to hit the fan in February. It has grown broader measures of credit at an astounding 20% annual rate in recent months according to estimates. That throws any pretense of caution out the window. New loans have re-inflated the real estate markets to bubblier levels, but “official” GDP growth has slowed to an historically low 6.7% rate. The reality is that true growth is well below that number as just about everyone knows.
Trading volumes remain lackluster with the computers still calling the shots. A magical bid shows up at regular times throughout the day as if some invisible hand wants to keep the hopes and dreams of the elite alive. Volatility sellers are still “picking up dimes in front of freight trains” at key technical points on the charts as well, driving stocks higher when needed. Pension plans have turned to this endeavor to replace incomes lost to Fed repression. That can’t end well. What we find bizarre is how relatively quiet the IPO market has been given that stocks are so close to record highs. We suspect it speaks volumes about the lack of a real bid in the markets.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.