More specifically, this piece should be titled, "Diminishing Effects of Global Quantitative Easing in a Long-Only Portfolio," but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan's direct equity purchases a sure thing? Have we globalized the, "Bernanke Put?" The European Central Bank, the Bank of Japan and the Peoples' Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.
The details measuring size and scope of the various countries' policies is not the point of this piece. The single most important thing to grasp here is that we've pulled ourselves from a single country facing the fears of an imploding economy back to the point that we can begin siphoning some of the slop out of the system. Globally speaking, this should make us first in, first out. In doing so, the US equity markets have extracted far more value from our nation's Quantitative Easing programs than the other nations can expect out of theirs.
Looking at the weekly S&P 500 chart below, you can see that we began enacting extraordinary monetary policies before the stock market bottomed. You'll also notice that as soon as each policy began to lose its starch, a new one was implemented. Hence QE 1, 2 and 3. Finally, The Taper last December began to slow the QE faucet. Please note that we have not pulled the first Dollar out of the injected reserves over the last six years, we've merely slowed our inflows.
|Timeline of the effect of Quantitative Easing on the S&P 500 futures.
The global economy crashed due to a credit glut. Ironically, the cure for the global economy's digestion appears to be another credit glut. In a world of more, more and more the economy is not allowed to reset itself. Therefore, the sovereign nations with the most to lose, those with high household debt for example are forced to jump in and try to pump up inflation. Banks can't issue second mortgages on homes that are upside down on their first mortgages. In our case, the government has attempted to come in and take delivery of some economic slack in order to right the economy over time. The single biggest difference between the effective programs enacted during the depression and our current version is that the Works Project Administration actually created things that our country would put to economic use once it started to improve. This time around, it's a handout. It fixes no bridges. It builds no roads. It wires no classrooms. As a result, the government is going to see zero return on its investment and our countries' economic position has not been improved for the long run. Lose, lose.
An initial argument would suggest that Japan's economy has been worse than ours for 20 years and to some degree, that's correct. However, 20 years ago, the Japanese citizen's average savings rate was and still is, far higher than our own (which is negative). This allowed the Japanese government to first sell bonds to its citizens in huge numbers. This transferred a large portion of debt from the government to its citizens. Currently, their situation is far more similar to our own. This is why the Bank of Japan's intended action of direct equity purchases by the government within their own equity markets is unprecedented. They're doing everything they can to deflate their currency and export their way to inflation while shoring up their equity markets to prevent an absolute nosedive. Based on the directive of their new Prime Minister Shinzo Abe and enacted by the Bank of Japan's Governor Harihuko Kuroda they've already dropped their currency 9% since Halloween's announcement. Meanwhile the Nikkei Stock Index is up more than 13%. Japanese investors are stuck in a balancing act between stock market appreciation and currency depreciation.
The game really comes down to two things. First, "Who has the most to lose?" Which country holds the largest accounts receivables and by whom are they owed? The holder of the notes can't afford for the debtor to become uncollectible. Therefore, it becomes a game of chicken between the bank and its biggest customer. Everyone knows it's going to end poorly. They just hope to be out before it's over.
Which brings us to China. Our relationship here is no secret. China has been the world's engine of growth with increasing importance each and every year. Obviously, things aren't as good as they've seemed. November 23rd, the Peoples' Bank of China cut their lending and reserve rates to spur domestic economic activity. Here is where we start to reach the tipping point. The Hong Kong Hang Seng Index(China) initially rallied on the rate cut but, unable break through even the mild resistance that had built up over the last month, quickly reversed course and is now lower less than a week after their surprise announcement. Investors have returned to the notion that bad economic news will be instantly sterilized by their governments' financial systems. This is encouraging the speculative risk that bubbles are made of. The "Bernanke Put" has gone global.
Finally, let's look at these government interventions in the financial markets over time. Referring briefly to the weekly chart, you can see that the US interventions from 2008-2012 were all enacted prior to the S&P 500 making new all-time highs. You can also see that we got about two years of juice out of the first program, a year out of the second and finally QE 3 lasted less than a year. Now, I refer to the chart below. Three of the world's largest economies all announced major Quantitative Easing in various forms over the last two months. This has pushed the S&P 500, Nasdaq and Dow Jones Index to new all time highs. However, neither the Russell 2000, the Nikkei 225 nor the Hang Seng Index have been able to maintain much momentum. In the past, the small caps have led the big caps. If small caps fail to join the rally, we may have seen all that QE 1- infinity can do.
|European, Japanese and Chinese easy money policies enacted in rapid order.
Finally, "Where's it all end?" My suggestion is that the U.S. Dollar will be the primary beneficiary of the current global economic policies for some time to come.