Quantitative Easing has artificially and unsustainably
inflated asset prices, as my business partner, Paul Gambles, recently told Money
Channel’s MJ Banphot.
A lot of people are getting confused by economic news that is
maybe not particularly promising, and yet they keep seeing all these risk-asset
prices getting higher and higher since they bottomed out at the low point in
December. Since then, we have seen a really strong rebound in risk-asset prices.
You have to look at this in terms of a longer-term picture. If you look all the
way back to 2008, when we had the Global Financial Crisis, since the period
following the recession, the so-called great recession, we have not really seen
any kind of economic activity recover the way we normally would after previous
recessions.
Unemployment is still a real problem out there. I know in the
States they are now saying it has come down from 9% to 8.5%, but it’s reducing
very slowly. If you look at the aftermath of previous recessions, unemployment
has always recovered much more quickly than it is recovering this time. Now,
there are a lot of people who would challenge those figures and say that the
8.5% figure is misleading and unrealistic because there are different ways of
calculating unemployment; if you have been unemployed for a year in the States
then they do not count you any more; if you are no longer looking for work, they
do not count you. As I have said in the past, lies, damned lies and statistics.
Perhaps an even more important metric is that average wages
in the US are still falling quite dramatically as well. Even if the above
figures are true and actually have gone from 9% to 8.5% unemployed, the total
quantum of what people earn actually is not getting any larger; consumer
earnings are not getting any bigger either because salaries per person are
actually getting lower. There is a real problem there in that if unemployment is
getting better, it is only improving very slowly. Also, it is not really
following through into the total amount of consumer earnings and, therefore, the
amount of money consumers have to spend because wages are falling.
There are also other measures; if you look at GDP, American
GDP for 2011 was only 2.8%. We have had something like twelve quarters now of
positive GDP since the official end of the recession, but it has been very slow
GDP growth.
Again, following a period of recession when economic activity
is muted and people stop spending, you would normally have a catch up effect
because neither people nor businesses were spending and so that really sends GDP
increasing quite sharply. We have not seen that either, so we have this
disconnect where real economic activity is very slow, very muted, and people can
see that in the streets.
If you go to America, you get the sense of unemployment and
of people worrying about their jobs, and of businesses that are really
struggling to operate and to borrow money, and yet asset prices, on the other
hand, have gone up really sharply since the end of the recession in 2008,
probably much sharper than would normally happen following a recession or a
depression.
A lot of people would say that the current asset prices are a
sign of optimism, but the real problem is the disconnect between the price of
assets, and the answer to that is something that we have been talking about for
quite some time, and that is that risk-asset prices are really being driven by
liquidity. When new capital comes into the markets, capital automatically finds
its way to the best opportunities. It will go wherever the highest return is. If
you have got capital yourself, you will go and place it where you think you can
get the best return. All capital basically behaves in that way.
What we were concerned about in the third quarter of last
year was that liquidity really seemed to be drying up. This happened, despite
all the efforts of the Central Banks, despite Quantitative Easing and all the
other things that bankers have done to try and force more money into a system
that was not generating extra money through its own economic activity. Despite
all that, we saw a couple of really alarming indicators in Quarter three of
2011.
We were watching the TED Spread and the LOIS, everyday. The
TED spread is basically the difference between the interest rate that gets paid
on the Treasury-Bill and the interest that gets paid on the EuroDollar, which is
basically the cost of borrowing Dollars outside of the United States, and that
gap was getting wider and wider all the time. Once that spread gets wider than
about 50 points, that is usually a flashing red light and a sign that we might
be heading into some kind of liquidity crisis.
The flashing red light went back to amber following the
intervention of global central banks, most evidently manifested in the ECB’s
LTRO #1 and #2 programmes which have pumped one trillion Euros into Europe’s
weakest banks and economies - but it is a small step from there back to the
danger zone. Be afraid, be very afraid... and be opportunistic too - there is a
real opportunity to profit from expected dislocations - non-US investors should
take a holding of Greenbacks to profit from any short term USD strength.
Above all, stay liquid. If you know where to look then there
are still good gains to be had but do not get tied up into anything which will
inflict severe penalties if you want a quick exit. Remember, if it sounds too
good to be true then it usually is.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
