On government (mis)intervention

So we’re in week 2 of the European Central Bank’s (ECB) quantitative easing.  Among the effects:

  • Bond bubble: some commentators have spoken phrases such as ‘bubbles are only obvious in hindsight’.  Well, despite articles justifying the purchase of negative medium-term bond yields, I hope it’s obvious to most that these 10-year bond yields are unsustainable:
  • Let's lock in 1% for 10 years, shall we?  Source: Bloomberg

    Let’s lock in 1% for 10 years, shall we? Source: Bloomberg

    Anybody notice in the above that countries such as Italy, Spain and France can borrow for 50% or less of the US Treasury?  Does that make sense to anyone?

  • Stocks flying: the S&P 500 is more or less even in 2015, despite tepid company results.  European stock indices are flying: the German Dax is up 23% YTD, for example.  While Germany is growing, that’s a big flier. (Side note: I’m happy I did that little bit of rebalancing a couple months ago).
  • UK house bubble keeps going: as written before, this market defies logic.  The UK government’s policy towards soaring house prices has been…um…subsidised mortgage financing.  It’s a sad joke.
  • US Dollar is king: as the Fed is turning the corner to raising interest rates, while Europe and the rest of the world are still cutting/QE’ing, the US Dollar index is up about 10% this year.  As mentioned before, if you’re American and thinking of international travel, or even moving offshore: go now.


Main street?  All the above is great news for investors (though not necessarily savers).  But I’m not convinced this QE helps these economies get back to business.

The direct intervention in financial markets means stock and bond capital gains are much greater (and more predictable) than business investment.  If you’re an entrepreneur, funding can be tight from the banks; why would they lend, when the government bonds they hold spare are making a better return on equity?  If you’re a corporate director, why borrow at low rates to build new plants or try new projects when the return on buying back shares is so good?

In sum: QE had a great initial function, in my opinion.  It loosened credit for big businesses; it jumpstarted merger activity; it finally anchored inflation expectations to essentially zero.  In my opinion, the usefulness of QE has been exhausted for the most part: as central bankers have mentioned around the world (and I’ve written about), it’s time for serious fiscal policy to kick in.  Let’s see some new roads, bridges, broadband, etc.

World financial markets to Japan Central Bank: 有難うございます。

Just as the QE tap gets closed by the Fed earlier this week, the Bank of Japan steps up to the plate with another JPY 10trn (around USD 130bn) of stimulus.  Queue financial markets back to all-time highs:

Doumo arigatou, Kuroda-san.  Source: thinkorswim by TDAmeritrade

Doumo arigatou, Kuroda-san.  Cancel crash.  Source: thinkorswim by TDAmeritrade

My favourite quote on this, from Bloomberg:

“Markets don’t really seem to care about what kind of stimulus we get or where it’s coming from, as long we get something,” said Teis Knuthsen, chief investment officer at Saxo Bank A/S’s private-banking unit.

Once again, the dip-buyers win: even if you pulled out at the death cross, you were out of the market for all of about 1 week before you got back in (missing out on about 0.5% of appreciation along the way).  Guess we just keep going until it stops working!

Fed ends QE; Treasuries rally?

From what I can tell, the Fed basically announced exactly what the market expected: no more $xx billion of price-insensitive demand for Treasuries and MBS per month; a better economy noticed; and rates will stay low for a considerable time.

So this is how the US Treasury Bond futures market waved farewell to QE:

Hurrah!  Less demand going forward!  Wait...what?  Source: thinkorswim by TDAmeritrade

Hurrah! Less demand going forward! Wait…what? Source: thinkorswim by TDAmeritrade

One would (naively) think the end of considerable, price-insensitive, demand would cause prices to fall.  And…no.  Must be that the event-risk of what the Fed could have said came to naught, so life is OK again.

On the plus side, bonds seem to be back to the ‘anti-equity’ trade: equity futures are off since the announcement.  Better keep those long positions in bonds, then…