QE – Quantitative Squeezing

by | Aug 5, 2013

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QE: You’ve Breathed In, So Breathe Out, Says Brian Tora:QE: You’ve Breathed In, So Breathe Out, Says Brian Tora: What a difference a month makes. Back in June, I was remarking that the reversal of fortunes for markets – which we now realise had only just started – was predicated on fears that the Fed was about to end its policy of quantitative easing (QE).

Now we know that this is what QE planned – and markets have taken a tumble as a consequence. But why exactly have investors taken fright? And, more importantly, are they right to do so?


The worry about a policy of printing money, which effectively is what QE is all about, is that too much of it will find its way into financial assets. And there is real evidence of this having happened back in 1999, when Alan Greenspan, who was then Chairman of the Federal Reserve Bank, poured money into the banking system to head off any glitch that might be brought about by the so-called millennium bug. The free cash that Greenspan unleashed helped to fuel the technology bubble.

Technology shares turned sour in March 2000 – coincidentally, the month when Mr Greenspan started to withdraw the cash which had never really been needed in the first place. The rest, as they say, is history.

…And Now?

Today, the situation is rather different. We have a full-blown financial crisis still fresh in the minds of policy makers, and there is every sign that it is far from fully behind us. Economic growth, meanwhile, is no longer the given that we assumed it was a dozen years or so ago.

And perhaps this is why markets have taken such sudden fright at the prospect of the world’s largest economy easing back on its quantitative easing. We might want to draw comfort from the thought that this is a move the authorities there will only take once they are confident of a strengthening domestic economy; but prospects elsewhere in the global business village are looking distinctively less cheery.

China, in particular, appears to be coming off the boil. Witness the poor performance of mining stocks and the commodity-sensitive Australian dollar.


Indeed, it seems that only the US dollar is in demand right now from an investment community that has turned decidedly risk-off. The American story is certainly looking more compelling these days. Cheap energy through shale oil and gas and more competitive labour markets there – partly a consequence of rising wage rates in the Far East – suggest that manufacturing in the US could support the economic revival there. And there is clear evidence that consumer confidence is on the mend.

Meanwhile, the mighty Goldman Sachs has downgraded China’s growth expectations, adding to concern over the health of the Chinese banking system – all of which prompted quite a tumble among equities.

And that’s another thing. For an economy that has been transformed in less than a generation, it has proved remarkably difficult to make money there. Even the famed Anthony Bolton has decided to retire from running the China investment trust that enjoyed a high profile and successful launch, but has disappointed ever since.

The Financial Weather Forecast

Perhaps the real message for investors is that things may get better, but only slowly. In the end, the removal of such artificial stimulants as QE might turn out to be a good thing. For a start, savers might start receiving a decent return on their cash deposits. However, taking away the support that an easy monetary policy provides is bound to cause alarm. So we could well be in for an uncertain summer – and not just in terms of our domestic weather.

The sell-off that the Fed’s steer occasioned may well throw up some interesting investment opportunities. Shares are certainly cheaper now, but not all bargains should be chased. Bonds will surely suffer further from the absence of a bond buying programme, while Emerging Markets are looking less of a certain growth area. For the time being ,quality and caution should be the watchwords for those constructing portfolios.

Brian Tora is an associate with investment managers, JM Finn & Co





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