Has QE failed?

talexuser

Interesting article about Deustche Bank bear analysis:
http://www.telegraph.co.uk/finance/markets/questor/11306641/FTSE-to-fall-30pc-if-global-economy-derails.html

Basically it argues the fundamentals of a 2009 recession have not been addressed and all QE has done is boost asset prices in inappropriate ways, actually detrimentally compared to a balanced recovery (however not mentioning the carnage that presumably would have happened without the stimulus confidence of QE?).

Personally I find it hard to reconcile a supposed "free market driven" economy with one that depends on central bank money printing to keep it running?

kidmugsy

talexuser wrote: »

Basically it argues the fundamentals of a 2009 recession have not been addressed and all QE has done is boost asset prices in inappropriate ways, actually detrimentally compared to a balanced recovery

That seems quite likely to me - something introduced in the US by the intellectual sons of Greenspan, and here by Brown, was unlikely to be deftly chosen. In particular, nobody explained how the QE was to be ended without return to the status quo ante.

At the time various financial people argued persuasively for the use of good bank/bad bank solutions to deal with the financial crisis.

Since my expectations of politicians are low, I wasn't too surprised by the clumsiness of the reaction to Northern Rock, but I was disappointed that with the notice that Northern Rock gave of the underlying problems, the next batch was dealt with so badly. Brown should hang his head in shame.

One other thought: it would seem that Fred Goodwin's reckless running of RBS involved no illegality (otherwise, why isn't he in jail?). But if so it means that the system of regulation - also the fault of Brown - was presumably No Bloody Good. Is the new one likely to prove better? Search me.

It's a shame about Brown; such an able young man ending up as such a dismally bad middle-aged Chancellor.

Ryan_Futuristics

This is exactly my perspective ... We should be in a long, deep global recession, but instead we've pumped $trillions into the economy which has simply inflated asset prices

Everyone holding UK or Asian property funds: your money is in empty houses or property bubbles; tech stocks like Facebook: they're barely real businesses; UK energy or mining stocks (overvalued with gloomy prospects); the US (60% overvalued ... and that's quite conservative)

This is why US stocks are less than 3% of my portfolio; I've only got 0.6% in property; I don't hold any UK energy or mining stocks (active funds - indexes are all overexposed); why I'm aiming to stay around 25% invested stocks ... this is why I don't think the next 10-20 years are going to be like anything markets have experienced before ... The one thing QE can't disguise is valuation

Mistermeaner

Ryan_Futuristics wrote: »

This is exactly my perspective ... We should be in a long, deep global recession, but instead we've pumped $trillions into the economy which has simply inflated asset prices

Everyone holding UK or Asian property funds: your money is in empty houses or property bubbles; tech stocks like Facebook: they're barely real businesses; UK energy or mining stocks (overvalued with gloomy prospects); the US (60% overvalued ... and that's quite conservative)

This is why US stocks are less than 3% of my portfolio; I've only got 0.6% in property; I don't hold any UK energy or mining stocks (active funds - indexes are all overexposed); why I'm aiming to stay around 25% invested stocks ... this is why I don't think the next 10-20 years are going to be like anything markets have experienced before ... The one thing QE can't disguise is valuation

what happens if you die before your investments reach their true value?

Dont disagree with your approach its just that you may be waiting forever for the irrational to become rational

Linton

Ryan_Futuristics wrote: »

This is exactly my perspective ... We should be in a long, deep global recession, but instead we've pumped $trillions into the economy which has simply inflated asset prices

Everyone holding UK or Asian property funds: your money is in empty houses or property bubbles; tech stocks like Facebook: they're barely real businesses; UK energy or mining stocks (overvalued with gloomy prospects); the US (60% overvalued ... and that's quite conservative)

This is why US stocks are less than 3% of my portfolio; I've only got 0.6% in property; I don't hold any UK energy or mining stocks (active funds - indexes are all overexposed); why I'm aiming to stay around 25% invested stocks ... this is why I don't think the next 10-20 years are going to be like anything markets have experienced before ... The one thing QE can't disguise is valuation

Sorry I disagree with your perspective..
I really cant get enthusiastic about a long deep global depression as a desirable alternative. QE may have replaced it with a long global stagnation, but that seems the better of those two options to me and to probably the majority of the world's population.

As to money being pumped into the economy, that seems to me to be patently at odds with the world as one sees it. Pumping money into an economy should lead to high inflation in the cost of goods and labour. Any evidence of this? Quite the contrary, we have been much closer to deflation. The QE money isnt reaching the real economy of people earning and spending, employment and companies investing and making and selling of goods. Look at another indicator of excess money - property prices. These are little changed since before 2007, except possibly in international hot spots, there is no evidence of a gross excess of money. Why? - The money has essentially been circulating from the central banks to the commercial banks and then back again to the central banks raising the value of government bonds en route.

Now looking at your investment advice. ISTM 25% stocks is far too cautious whilst there are many solid companies happily paying >5% dividends and the FTSE100 averaging around 3.5% yield. |The latter figure has been pretty constant over the past 12 years. Do you really believe that the "true" value of companies should be substantially lower with the corresponding "true" yield figure much higher? For further evidence look at the FTSE100 P/E - it is very much at the average of the past 50 years.

I am sure you are right when you say that the next 10-20 years will be nothing like any previous period. But then isnt that always the case? The answer isnt to retreat into a shell of guaranteed safety but rather to diversify widely.

Am I being unfair in suspecting your risk acceptance is rather lower than you may believe? Please dont discover gold as the only real answer!

Ryan_Futuristics

ggb1979 wrote: »

what happens if you die before your investments reach their true value?

Dont disagree with your approach its just that you may be waiting forever for the irrational to become rational

Well the only good investments are done with a long horizon - and then it's simply a question of: Would you rather be at the top of a market that's peaked, or the bottom of one that's set to grow?

The other half of the equation is that my medium-term goal is income

US and global funds pay a dividend barely akin to a highstreet savings account, and as they inflate further, that typically gets lower ... The cheapest regions are paying dividends closer to 5% ... Short, medium or long-term, I just don't buy the arguments for buying expensive equities

Ryan_Futuristics

Linton wrote: »

Sorry I disagree with your perspective..
I really cant get enthusiastic about a long deep global depression as a desirable alternative. QE may have replaced it with a long global stagnation, but that seems the better of those two options to me and to probably the majority of the world's population.

As to money being pumped into the economy, that seems to me to be patently at odds with the world as one sees it. Pumping money into an economy should lead to high inflation in the cost of goods and labour. Any evidence of this? Quite the contrary, we have been much closer to deflation. The QE money isnt reaching the real economy of people earning and spending, employment and companies investing and making and selling of goods. Look at another indicator of excess money - property prices. These are little changed since before 2007, except possibly in international hot spots, there is no evidence of a gross excess of money. Why? - The money has essentially been circulating from the central banks to the commercial banks and then back again to the central banks raising the value of government bonds en route.

Now looking at your investment advice. ISTM 25% stocks is far too cautious whilst there are many solid companies happily paying >5% dividends and the FTSE100 averaging around 3.5% yield. |The latter figure has been pretty constant over the past 12 years. Do you really believe that the "true" value of companies should be substantially lower with the corresponding "true" yield figure much higher? For further evidence look at the FTSE100 P/E - it is very much at the average of the past 50 years.

I am sure you are right when you say that the next 10-20 years will be nothing like any previous period. But then isnt that always the case? The answer isnt to retreat into a shell of guaranteed safety but rather to diversify widely.

Am I being unfair in suspecting your risk acceptance is rather lower than you may believe? Please dont discover gold as the only real answer!

I think you're seeing exactly what we'd expect to see, which is that asset prices *appear* to be in line with what they were before the crash (e.g. housing costs roughly the same vs average incomes as it did in 2008), and unemployment appears to be reducing ...

... Yet the real story we hear is that people can't afford houses (and those that can are only able to make ends meet while rates stay historically low), employment's increased but wages haven't (many working zero-hour contracts), and there's this mysterious drop in oil and commodity prices which would generally signal an industrial slowdown

The worry is that with this much cash floating around the system, no one knows how healthy any of these companies are ... As Warren Buffett said: "Only when the tide goes out do you discover who's been swimming naked."


On to specific issues ... The FTSE 100's cyclically adjusted P/E is promising (and I'm about 33% UK in my equities portfolio), however it can be distorted by financial and energy companies, and what's less positive is the UK's price/book value of 2.1, and how closely tied it is to the US economy

On risk, I never take risks that aren't carefully measured and that I believe to be in my favour ... e.g. I've never bought a lottery ticket, never placed a bet ...

I think the US markets need to drop by about 50%, and I think they will (either quickly or slowly) once QE's out the picture ... So a 3.5% yield does not justify (to me) holding on for 2 years while capital halves

Which of course it might not, and that's why I'm 25% in, and I think there are still bargains out there if you search carefully (in fact a fair few once in a quarter-century bargains) that are worth holding on a long-term basis

TCA

Ryan_Futuristics wrote: »

why I'm aiming to stay around 25% invested stocks ...

What's the other 75% doing? I think you said some in P2P lending but what about the rest?

Ryan_Futuristics

TCA wrote: »

What's the other 75% doing? I think you said some in P2P lending but what about the rest?

I'm over 50% cash - and have been for a while - which certainly isn't ideal

I'm pondering another 5-10% in P2P lending (maybe consumer lending through Ratesetter) as a stable 6-8% return looks very appealing to me right now ... Hedge fund managers have jumped all over P2P lending in the US (which may not be such a good thing for the P2P industry)

Funnily enough, I'm seeing more articles pop up now which suggest I'm not alone: "Bill Eigen, famed fixed income investor who works for JP Morgan has taken his unconstrained bond fund to an incredible 90% cash in the past – peaking in 2007. He now holds 55% of his fund in cash as he prepares for what he calls “double digit devastation”, that is the effect rising bond yields will have on prices."

http://www.morningstar.co.uk/uk/news/132373/should-you-invest-in-cash.aspx

tigerspill

Ryan_Futuristics wrote: »

I'm over 50% cash - and have been for a while - which certainly isn't ideal

I'm pondering another 5-10% in P2P lending (maybe consumer lending through Ratesetter) as a stable 6-8% return looks very appealing to me right now ... Hedge fund managers have jumped all over P2P lending in the US (which may not be such a good thing for the P2P industry)

Funnily enough, I'm seeing more articles pop up now which suggest I'm not alone: "Bill Eigen, famed fixed income investor who works for JP Morgan has taken his unconstrained bond fund to an incredible 90% cash in the past – peaking in 2007. He now holds 55% of his fund in cash as he prepares for what he calls “double digit devastation”, that is the effect rising bond yields will have on prices."

http://www.morningstar.co.uk/uk/news/132373/should-you-invest-in-cash.aspx

So I have just read that article and have a question (showing my naivety).
What does it mean to "invest in cash"? What are the vehicles (other the savings/bank accounts)? Is an Absolute Return fund a cash investment?

Ryan_Futuristics

tigerspill wrote: »

So I have just read that article and have a question (showing my naivety).
What does it mean to "invest in cash"? What are the vehicles (other the savings/bank accounts)? Is an Absolute Return fund a cash investment?

To a private investor it would typically just mean sticking it in a bank savings account ... To an institutional investor, it might mean a Money Market fund (which is effectively the same thing)

Absolute Return funds are generally much less stable - they're often very actively traded funds which use bonds and fixed income investments, along with often going long and short on various stock markets (betting on the market to rise, or betting against the market when it falls, "short selling")


But I should say don't let my pessimism put you off anything - there are many out there predicting another 5 years of very strong stock market returns ... When I'm in doubt I go back to the old saying "Don't be less than 25% in the market or more than 50%", and QE's medium-term effects just put me in uncertain territory