Another QE would be gilding the lily
Returning to my desk after two and a half weeks and I find the same unanswered questions, the same volatility and the same derisory volumes going through the markets. At first I thought that the 2.79% rally on the Dow and the 3.43% rally on the S&P were the equity markets welcoming me back, but I am now told that they are having an early party for the anticipated announcement of QE3 by chairman Bernanke at the Jackson Hole central bank jeans and T-shirt offsite this coming weekend.
I heard my chum Howard Wheeldon of BGC Partners on BBC radio this morning suggesting that QE3 was coming and that it would be the last throw of the dice. I disagree. The Fed has effected two significant rounds of quantitative easing to no measurable effect other than to boost asset prices without notably stimulating the economy beyond tickling its tummy.
“’Big Ben’ Bernanke would be advised to hold off”
The announcement a few weeks ago that front-end rates would remain anchored at their current level for at least the next two years has given the market a free lunch in terms of buying the long end and the yield curve has flattened significantly – in August alone the two-year/10-year spread has flattened by 60bp to about 190bp. This has a two-part effect.
First, banks are given a risk-free option to rebuild their balance sheets by buying long treasuries and funding them in the short-term markets (risk free, so long as the short-term markets are working which is another matter entirely) and, second, by encouraging, hopefully, capital investment and, more the point, mortgage BORROWING. To add a further round of QE would be gilding the lily and given that there is still no sound evidence that flooding the world with cash has done anything to rectify the imbalances which led to the financial crisis of 2008 and subsequent recession, I think “Big Ben” Bernanke would be advised to hold off.
However, although the papers are full of the view that the grand stock rally of August 23 is all to do with Jackson Hole, I suspect that it is another case of clueless journos looking for a post-factum explanation of something they don’t understand. Personally, I don’t think that there is much to understand. We are in a period of low volume/high volatility trading and a 3% or 4% day has become rather ham on rye. In the past three weeks, I would have thought that most of a third have been in that league. There is no doubt that equities look cheap on current valuations but as all stock valuations are based on forecast earnings, a downward revision of those forecasts would completely restack the deck and anything that looks good on valuations at current levels could suddenly look very expensive even if 10% cheaper.
On the other hand, if the next leg of the recession were to prove to be short and shallow or not recessive at all, then stocks will prove to have been a bargain at current levels. If. And, if my grandmother had had wheels, she could have been the Number 27 bus.
Alas, I have spent most of my time off in the US of A – more of which in the coming days – bit firstly I’d like to thank all those Wall Street grandees who took time out of their unbelievably busy schedules (not) to meet with me. The hospitality, as ever, was terrific.
The streets of New York seemed as busy as ever but I was struck when out of town at how quiet the shopping malls were compared with the usual. Even Sam’s Club and Costco centres were quiet. I’m sure that there was an element of August lull involved but there was a notable lack of that urgency under which everybody has to own everything which was so pervasive in the past. However, I was happy to buy several pairs of my trusty Levi 501s for US$36.99 a pair (on a sales tax holiday in Maryland) rather than paying £80.00 for the same product here… Britain and the US are evidently divided by more than just a common language.
I was also struck by the comments of one American friend there who pointed out that in the past advertising had always been directed at the aspirations of readers and listeners but how it had become “…get what you deserve…” This ties closely into the entitlement culture which appears to be at the core of many of the sovereign debt issues which are facing us and which of course stands in the centre of the UK riots which I so neatly side-stepped.
Incidentally, I’m not sure whether this is an urban myth or not but apparently the only shop in Clapham that was not looted and plundered was Waterstone’s, the bookshop. E si non è vero è bene trovato.