Guest Post: Is QE A Victimless Crime?

Guest Post: Is QE A Victimless Crime?

Submitted by Peter Tchir of TF Market Advisors,

If this was a before and after picture trying to flog weight loss treatments or hair restoration, it wouldn’t even be worth buying add time on late night TV.

Mortgage Applications for Purchases

Where is the QE impact?

Here at least there seems to have been an uptick with the onset of QE.  Though, it seemed to be a continuation of a trend.  Lately it has declined and is back to levels that seem to the naked eye to be lower than pre QE levels.

Emerging Markets

Where is the QE impact?

EM is volatile enough that it might be a stretch to make some causation arguments, but it looks like you could make the case that QE initially helped EM as capital was (mis)allocated but that the threat of Tapering is making problems worse than they might otherwise be.  I admit it is probably a stretch, but one that I am willing to bet a lot of locals would be happy to make.

U.S. Stock Market

We all know that stocks are higher, but why?

The big impact seems to be a willingness to pay more for a given level of earnings rather than real earnings growth (which has played a role).

It seems like you could make the argument that QE created a lot of money that had to chase something, so it chased stocks.  Maybe that is good, though the wealth effect argument seems bogus to me.  Most people see their assets go up in value, but see their job security steady at best and future benefits declining, probably at a faster rate than the wealth effect.

I think it is a game and the Fed has demonstrated without a doubt that they can cause inflation in paper assets.

Inflation?

Asset price inflation, yes, but real inflation?

Not so much.  The CRB index rallied into the announcement of QE (along with Draghi’s “whatever it takes” message).  Since then, it has done little.  You would think that if the economy was really chugging along that somehow we would see some commodity inflation, but we aren’t (though I am not sure why creating inflation is such a good thing for those who eat, drink, and travel, but then I am not a prize winning economist, but I guess if you just give more food stamps it wouldn’t matter anyways).

Financial Engineering versus Engineering

I haven’t been able to pull the data up myself, but I suspect that we are seeing high levels of stock buybacks and that a lot of debt is being issued to fund that.  The CLO market is on fire.  The number of new ETF’s is almost mindboggling.  So it is clear that Financial Engineering is alive and well (I still think synthetic CDO’s will make a comeback this year).

Where is the real growth in “engineering”?  A lot of the big companies still seem to be laying people off.  There are jobs but it doesn’t seem to match the pace of growth that we see in stock markets.

Maybe, not only does QE not directly impact engineering, it may be detrimental.  If managers don’t believe in the growth they are unlikely to launch new businesses (especially when returns from financial engineering are so much easier).  In fact, as asset prices grow due to multiple expansion, without the commensurate pick up in real growth maybe they are less likely to commit capital?

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