You don’t know what you’ve got till it’s gone, says Brian Tora. What will QE leave us with?
2013 may have come in with something of a roar, but it left us with more of a whimper. It wasn’t that things turned sour as we approached the festive season – rather that investors ran out of puff. Perhaps it was the prospect of what the year ahead might hold in store that was weighing on investor sentiment. So what indeed might we be facing, as the days lengthen and 2014 gets underway in earnest?
The big issue appears to be how the US Federal Reserve Bank will go about unwinding the massive financial experiment that is quantitative easing. Sentiment on how the end to the process might affect financial assets has veered dramatically over recent months. When first mooted by Fed Chairman Ben Bernanke last May, markets moved sharply into reverse, with those in the emerging nations the hardest hit.
Hubble Bubble, Toil and….
Put simply, the major concern has been the extent to which all this newly-minted cash, issued to mitigate the effects of the financial crisis, has found its way into shares. Certainly, there have been plenty of precedents to suggest that printing money can help fuel asset bubbles. When Bernanke’s predecessor, Alan Greenspan, pumped money into the financial system in the late 1990s, the main beneficiary was the technology sector. And just look what happened then….
Back in 1999, the worry was what might occur when the date changed to 2000. Much of the software written for the computers that were playing an increasingly important part in our daily lives had simply not taken into account a date change that could be taken as a backward move. 99 to 00 was a real worry – and tales abounded of what the millennium bug might do to us all – such as planes falling out of the sky.
The possibility of the financial system seizing up was easier to tackle by just making more cash available. In the end our worst fears turned out to be groundless, though a positive army of IT consultants grew fat on the avoidance action that was taken. But was it a coincidence that the boom in the technology sector gathered speed just as the Fed pumped the bulk of the money in? Or that the bubble burst as the cash was clawed back?
This Time It Isn’t Different
What we have seen so far has been anticipation of what might occur. The reality lies before us, but governments should still be aware of possible consequences.
Much of the mid-year concern evaporated immediately upon the announcement of Mr Bernanke’s successor. Janet Yellen, the incoming Fed Chairman, is viewed as more cautious than other potential candidates, and less likely to undertake precipitate action.
That’s a good start. But the fact remains that governments cannot go on shelling out cash indefinitely. Naturally, we need to accept that not all the money made available by QE will have found its way into the type of projects that would be seen as positive for the economic recovery. However, we might reasonably expect to see further measures aimed at somehow transferring the impetus for further growth away from monetary policy and onto other areas of stimulus.
So we can expect 2014 to be a year of change. With Ireland coming out of the lifeboat for those over-indebted nations within the Eurozone, and with more encouraging noises coming out of Portugal as well, perhaps we might even see more positive moves in Europe.
Still, investors would be wise to remember that our political masters can sometimes take the wrong action for selfish reasons. Personally, I face 2014 with cautious optimism – but I will be watching the action of governments closely.
Brian Tora is an associate with investment managers, JM Finn & Co