"The art of financiering consists principally in multiplying and confusing accounts, till, at last, no one has courage to undertake an examination of them." William Cobbett "The Budget" 1805

 

“I imagine that Ben Bernanke, Mario Draghi and Haruhiko Kuroda all stay awake at night imagining ways to force negative rates on savers. But the larger question, beyond a sociopathic desire to control others in service of one’s own intellectual dogma, is why anyone would advocate such policies. I can’t emphasize strongly enough that there is no economic evidence that activist monetary intervention has materially improved economic performance in recent years.” John Hussman 2016

 

The effects of quantitative easing may be diminishing compared with a few years ago, but “what we should say is, ‘Effects are diminishing, so let’s do more.’ This is the spirit of Abenomics.” Etsuro Honda, an advisor to Japanese prime minister Shinzo Abe

 
William Cobbett would no doubt be amazed at the level of “multiplying and confusing” that is practised by the central banks and the general banking system at large. Large perhaps not being an adequate description of say the Fed’s balance sheet, investment banks’ derivatives’ books or unacknowledged bank bad debt all of which are up there in the trillions.

John Hussman has dared suggest that the emperor has no clothes. It is no mere suggestion, but fact, that quantitative easing, negative interest rates, deployment of helicopters (do they know how expensive it is to fly helicopters?!) and other sundry methods, designed on the back of a fag (cigarette to our US readers) packet, to normalise economies, has failed. Unless of course your goal is to inflate the stock and bond markets to levels of over valuation that will ultimately lead to a crash, which of course our heroic masters of the economic universe will fail to see coming and will have very little ammo left to do anything about.

The question is of course, “When?” With any degree of accuracy, it is an impossible question to answer. Etsurosan is typical of his breed confidently predicting that more of the same will work…eventually – beatings will continue until moral improves etc etc. Japan has been subjected to 25 years of monetary experimentation and has little, and that’s being generous, to show for it. GDP is barely above 1991 levels and the mean growth rate is less than 1%. The Nikkei was over 22,000 and interest rates were 6%; today they are 16,500 and minus 0.1%. The only thing to have gone up is the BoJ’s balance sheet from under Yen 1 trillion to over Yen 4 trillion and, as if that weren’t enough, they want to do more!

David Fuller's view

Quantitative easing (QE) has pushed most stock markets higher, as was intended, and central banks (CBs) hoped that this would increase confidence, leading to stronger economies.  This has not really happened, as we know, not least because there has been less fiscal spending by governments anxious to get their budget deficits down before interest rates eventually move higher. 

Similarly, most corporations have been cautious and therefore reluctant to spend on research and development.  Instead, they have rewarded management and shareholders with stock buybacks which have also flattered earnings.  Record low interest rates in Western economies and Japan have also encouraged corporate takeovers.

In fairness to CBs, they have variously and frequently called for fiscal spending by their respective governments.  Since this has mainly fallen on deaf ears, CBs have felt that they had little choice but to increase QE, drive interest rates into negative territory in Japan and EU economies.

Needless to say, this off piste monetary policy is experimental, unprecedented on such a scale, and presumably risky.  As Warren Buffett said in another context: “Only when the tied goes out do you discover who’s been swimming naked.”

Clive Hale and an increasing number of other experienced investors say the eventual dénouement will be traumatic.  He mentions a black swan which could emerge from any number of regions, including Europe or China.     

I share the concerns, although monetary policy remains favourable for equities.  However, that could change quickly given that growth in corporate profits is selective and not impressive across broad indices such as the S&P 500 Index.  I would prefer a diversified portfolio to cash, although there are reasons for holding some cash.  QE favours quality shares, including inform Autonomies.  Leading resources shares also remain in play.  I seldom invest in bonds but short-term US government paper is a haven offering some return.  Gold and higher beta precious metals offer diversification and would presumably benefit from a panicky environment.  I do not like hedge funds which remain expensive and occasionally blow up.  I would also be wary of illiquid funds including property.  

Lastly, we could easily see a cyclical bear market over the next year or two.  However, a crash on the scale of 2000 or 2008 between now and August 2018?  In markets we should be wary of saying that something is impossible, but a third meltdown of that magnitude within 18 years would be unprecedented.   

Here is View from the Bridge.