“David - my thinking remains the same really: direct answer - no, but in the event of an exogenous shock to the financial system that somehow exposes some of the current structural imbalances brought on by the QE - "massaged" market effect that, in turn, causes the awe-inspired mantra of the global central banker hierarchy to dissipate, at that juncture I would then give more credence to the view that markets might be capable of undoing some of these "massaged effects", thus causing pressure points to emerge (with the associated possibility that they might "break"). If that were to show up as price action in the charts, then one might have to consider whether giving more credence to a viewpoint, as expressed by Marc Faber (and others), that, conceptually, shorting central bankers is his trade of the year, would then hold greater relevance? In summary, it is particularly because I am not familiar with the line of thinking taken by Crispin Odey that I feel the urge to understand the composition of his big picture view (and, at the same time, I need to have catalysts that make me re-visit my own view, so that I may validate it, or question it).

David Fuller's view

Many thanks for an interesting and thoughtful reply on a topic of considerable general interest. 

I should explain that I am happy to receive reports which subscribers think are really interesting, for one reason or another.  While I read and observe a fair amount of market comment, the reality is that I will only see a fraction of what is actually out there.  There is a quality control element and we cannot read everything, so I encourage readers to forward articles and reports only which they think might be of interest to not only Eoin or me, but also the Collective of subscribers.  That is effective networking, in the spirit of Empowerment Through Knowledge.

On receiving a bearish article from the subscriber above, I replied with an email saying: “Do you believe it?”  The answer was well considered, as you can see above.  We know that QE is a controversial experiment and that not all of its potential effects are known.  Nevertheless, I maintain that it prevented a more destructive downturn, in terms of GDP, bankruptcies and unemployment.  We also know that QE has been very good for investors, which is not surprising, because that is one of the results that Ben Bernanke wanted, when he first introduced QE, because he believed it would improve confidence. 

Nevertheless, QE has been roundly criticised by a number of high-profile financial spokesmen.  I suspect this is mostly because it was largely new and therefore unproven.  Others described it as a ‘free lunch’, upsetting the natural order of business cycles and creating structural imbalances in the process.  We were also told, often with fervent zeal, that it would end badly.  Well, theoretically, anything is possible but we can say those forecasts have been premature.  Moreover, one of the first and most helpful mantras that I heard when working on Wall Street in the 1960s: “Don’t fight the Fed”, is still working today and there is no mystery as to why this is the case.  QE obviously works for other central banks as well. 

Investors who monitor market commentary will inevitably hear every possible forecast.  I will leave it to subscribers to determine the motives behind some of the more extreme forecasts which may not appear logical.  However, without wishing to cast aspersions, I will point out that they may not have your best interests at heart.  Additionally, people talk their book, otherwise they would be schizophrenic.  In other words, you can be certain that bears are less fully invested than bulls.  You also have price charts which are a reality check, at least in terms of the timing accuracy of any forecast. 

When Eoin and I discuss all the data we see, there are still far more bullish than bearish factors for stock markets.  The main exceptions are persistent problems of governance and over dependence on the export of resources.  Moreover, most of the bearish technical factors that we see are evident when markets are temporarily overextended and losing uptrend consistency prior to some short to medium-term mean reversion.  All of the factors that we mention in terms of potential secular bull markets - accelerating technological innovation, cheaper energy costs, increasing numbers of middleclass consumers, the triumph of capitalism, globalisation, increasing populations in many countries – are clearly in play.  Lastly, and most importantly in the current environment, monetary policy remains generally accommodative. 

Yes, valuations are rising in a number of markets, not least in the USA, and this does increase risks.  Yes, the Fed is likely to raise rates by at least 25 basis points before the next Presidential election and this prospect creates some apprehension, although rates will still be historically low.  Debt levels are high and this can cause problems if GDP growth slows, or interest rates move higher more quickly than debtors are expecting.  Nevertheless, we think the risk of a significant crash anytime soon, at least based on what we all know today, remains low.  Markets may become somewhat more volatile, and seasonal factors are often less favourable between May and October.  However, unleveraged investors with reasonably valued portfolios face far more upside than downside scope over the lengthy medium to longer term, in my opinion. 

Lastly, I have often described stock markets as contestants in a global beauty contest for which the crowd of investors are judges.  People have learned that QE, despite longer-term uncertainties, has considerable medium-term allure.  QE currently favours Japan and EU stock markets which remain in form, albeit temporarily overextended.