Guest Post: Is QE A Victimless Crime?

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Submitted by Peter Tchir of TF Market Advisors,

QE a Victimless Crime?

If that title can’t make you want to read this piece on such a dull day, then nothing will.

Tomorrow we prepare for a “new” Fed.  It looks a lot like the old Fed, but one can hope.

There are some that hope to test the new Fed.  There are some that believe the new Fed might throw a monkey wrench into the rally.  There are others that believe the recent bout of weaker than expected data will let the new Fed turn the spigot back on to full.

I have heard all of the above, and heard it from people that are “plugged” in, so at least we know that confusion about how the Fed will behave is something we will have to deal with and that we should get some clarity on tomorrow.

In the meantime I wonder if QE is worth it?  Does it do what it is “supposed” to do?  No.  I don’t think it has done much for jobs or inflation or housing.  I look at the pre QE data and the post QE data and I am underwhelmed (I will admit that it is difficult to call something pre QE since it does seem that we have been under one form or another of Federal Reserve support since 2007).

But what real evidence is there that QE is helping the economy?  Would we be the same without it?  Better even?  I am told no, but I am told a lot of things that turn out not to be true.  If it was clear that QE was really helping the economy, I wouldn’t be wondering why we do it.

But is there any harm to QE?  That is the other side of the coin.  Who cares if it doesn’t help the economy if it isn’t hurting anyone?

Ask any person from an Emerging Market whether QE is harmful and you will likely get a very different answer than the one Ben has given.  Maybe they will just use QE as a scapegoat for their own internal problems, but it doesn’t make the tensions any less real.

Maybe higher stock prices are good?  Maybe artificially created stock prices (the Fed has told us to go buy stocks) create misallocations of resources and motivations that are not actually helpful in the long run.  We have no idea whether we would have more jobs by now or fewer if there was no QE.  We have no idea whether businesses would have been more aggressive if they couldn’t rely so much on financial engineering.

I think QE is running out of steam as a policy tool.  They cannot abandon it quickly as it has been pitched hard for a year and no amount of spin can change that, but I think we will see some interesting trial balloons floated by this new Fed.  Some might work better, but I think the market’s initial reaction will be one of skepticism.  We know how QE works – it makes stocks go higher – so anything else might just not have the same appeal.

So here is why we question the ongoing pursuit of QE and have to believe that Beer Goggles Fisher sees some of the same things and gets to ask his colleagues behind closed doors about them.

Non-Farm Payroll

Where is the QE impact?

If this was a before and after picture trying to flog weight loss treatments or hair restoration, it wouldn’t even be worth buying add time on late night TV.

Mortgage Applications for Purchases

Where is the QE impact?

Here at least there seems to have been an uptick with the onset of QE.  Though, it seemed to be a continuation of a trend.  Lately it has declined and is back to levels that seem to the naked eye to be lower than pre QE levels.

Emerging Markets

Where is the QE impact?

EM is volatile enough that it might be a stretch to make some causation arguments, but it looks like you could make the case that QE initially helped EM as capital was (mis)allocated but that the threat of Tapering is making problems worse than they might otherwise be.  I admit it is probably a stretch, but one that I am willing to bet a lot of locals would be happy to make.

U.S. Stock Market

We all know that stocks are higher, but why?

The big impact seems to be a willingness to pay more for a given level of earnings rather than real earnings growth (which has played a role).

It seems like you could make the argument that QE created a lot of money that had to chase something, so it chased stocks.  Maybe that is good, though the wealth effect argument seems bogus to me.  Most people see their assets go up in value, but see their job security steady at best and future benefits declining, probably at a faster rate than the wealth effect.

I think it is a game and the Fed has demonstrated without a doubt that they can cause inflation in paper assets.

Inflation?

Asset price inflation, yes, but real inflation?

Not so much.  The CRB index rallied into the announcement of QE (along with Draghi’s “whatever it takes” message).  Since then, it has done little.  You would think that if the economy was really chugging along that somehow we would see some commodity inflation, but we aren’t (though I am not sure why creating inflation is such a good thing for those who eat, drink, and travel, but then I am not a prize winning economist, but I guess if you just give more food stamps it wouldn’t matter anyways).

Financial Engineering versus Engineering

I haven’t been able to pull the data up myself, but I suspect that we are seeing high levels of stock buybacks and that a lot of debt is being issued to fund that.  The CLO market is on fire.  The number of new ETF’s is almost mindboggling.  So it is clear that Financial Engineering is alive and well (I still think synthetic CDO’s will make a comeback this year).

Where is the real growth in “engineering”?  A lot of the big companies still seem to be laying people off.  There are jobs but it doesn’t seem to match the pace of growth that we see in stock markets.

Maybe, not only does QE not directly impact engineering, it may be detrimental.  If managers don’t believe in the growth they are unlikely to launch new businesses (especially when returns from financial engineering are so much easier).  In fact, as asset prices grow due to multiple expansion, without the commensurate pick up in real growth maybe they are less likely to commit capital?