Stocks near 5-year high despite worst earnings season since crisis
I was discussing this with a few friends online a couple of weeks ago and now it’s all over the news. Earnings have been poor, yet stocks continue to push higher.
One argument was that “the key is deleveraging the banking system in an asset-inflationary manner. So, the Fed is indeed in control. There is a discrete amount of QE that achieves this outcome.”
My counter here was that “it won’t work. Recession is coming and asset inflation will be overwhelmed by real economy deflation in a New York minute. A new recession will be asset deflationary as well as real economy deflationary and that could mean bank failures. In that sense, the Fed will have failed. it will have failed to pump up the real economy on a sustainable basis. It will have failed to prevent a debt deflation that causes bank failures. And ultimately I believe it will have failed to promote sustainable asset reflation.”
I finished writing “I just don’t think the Fed is going to go guns blazing until it’s too late. I agree that extending to 2015 is a likely response. But if there’s no QE the markets will not be happy. When the Fed realises it has failed, it may start buying other assets like municipal bonds. But by then asset prices will be falling. The QE we have witnessed thus far will have failed.”
That’s still my argument.
Video on this dichotomy below
The problem for investors is that the valuations of companies is exaggerated and they are overdue for a correction. The fact that they are still so high is a sign that the alternatives are worse. The price to earnings multiples are at levels traditionally only seen just at tops of booms. This is no boom period. Many retail investors exited the market long ago. The only ones left are institutional investors and high frequency traders. The only reason that the Fed are supporting the stock market through fear of the impact of the “wealth effect”.
QE has protected the financialisation that occurred in recent years in a way that favours the wealthy while hurting the poor. It’s sustained the illusion that much of the bad debt out their may, in fact, be serviceable. It’s sustained the illusion that peoples pensions are worth what they currently say. It’s been a can kicking operation. That’s not necessarily a bad thing, if at the same time the thing your trying to ignore gets sorted out, but I’m not really sure the massive misallocation of credit has been addressed.
On QE itself, I’m clear on the fact its not been inflationary because of “newly printed money”, but because of it forcing portfolio preferences. I’m less clear that this will be the case for more exotic types of QE. I won’t pretend I know what these may be but in the same way people criticise fiscal spending as government picking winners, isn’t a central bank picking new asset classes to buy the same thing from the other direction?
Well said, Dave. You probably saw what the BoE said about QE. That’s been the source of much criticism in the media. No one really knows how QE affects the economy since this kind of monetisation hasn’t really been done on this scale in a fiat money system. We’re all learning.
But make no mistake, the government is picking winners and losers and this is a misallocation that will be negative in the next downturn. I pity those who get caught out when the risk on trade goes decidedly pear-shaped.
Yes it is a can kicking exercise in the hope that banks can rebuild their balance sheets at the publics expense. The problem I see is that so much of those profits are siphoned off to pay bonuses that the process will be slow.
My concerns are with the unintended consequences of QE. With all the trillions of extra dollars floating around it must be having a serious impact on the value of the holdings of oil producing nations. This could accelerate the replacing of the dollar with some other currency or commodity as the reserve currency. If that were to happen then the dollar might lose a lot of value overnight and that would be inflationary.