Ok, you heard it here first…sometime after the US election
and likely early next year we will start to hear chatter about a Fed QE exit
strategy…Do I think there will really be a QE exit? No. However I think that by
then it will be clear that an open ended commitment has numerous unintended
consequences and those consequences (mainly asset inflation) will need to be reined
in, if only through open mouth operations.
Now that indefinite QE has been loose in the wild for 10 days or so, I
have yet to hear even a theoretical argument (let alone actual evidence) of how
this particular brand of QE will stoke actual sustainable economic growth…So,
for those looking for a reflation trade it is worth noting that all the QE in
Europe and the US is likely to do ( and even the “stimulus” in China ) is to
potentially slow or stop the ongoing gradual
decline in economic activity, rather than inciting an actual reversal
and creating “growth”. I put growth in quotes since any growth will only be the
false growth that comes from more debt or money-printing…true growth net of
debt is nowhere on the horizon outside of a few select industries such as
portions of the energy industry, the smart-phone ecosystem and other niche
areas.
It is worth remembering, as Acting-Man recently discussed, that
markets are often lagging indicators and tend to ignore deterioration and
dangers signals until there is no choice, at which point the sudden collapse
mode is triggered. It feels like the slow but steady deterioration of economic
indicators globally is setting the stage for a severe correction in US equity
prices, but with several key differences from 2007. Markets are nowhere near as
overextended now as they were then, and businesses have streamlined
significantly, which makes any pullback much more likely to end up looking more
like a correction than a collapse. The problem with corrections in a market and
economy built on weak underlying fundamentals ( a reliance on printed money
being one such weak fundamental) however is that such a correction is only
“just a correction” in hindsight. The depth of any pullback will be unclear
during the pullback, especially with so much money waiting to jump in on the
short side looking for the next coming of a “big short”. However, I have seen
no price action so far that suggests a near term severe pull-back is imminent
in just about anything.
And a final word on the “slow but steady deterioration of
economic indicators”…the deterioration in the US so far seems to be within the
range of a slow-down than can be addressed without drastic action (such as major new downsizing by busnesses), so it has
not advanced to the point of being a macro-level self-reinforcing slow-down.
However it seems that the odds of the slow-down progressing to the
self-reinforcing trend-state are more likely than a sustainable pick-up in
economic activity, but there is no reason to speculate pre-maturely…markets
and data should reveal the next trend fairly soon.
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Eclectic Wealth is intended to educate and entertain, however the information contained, while believed to be accurate, is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind.
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