What QE cannot do
After four years of QE we still have low and falling global inflation, bank-
credit contraction in the USA and Euroland, and a major
economic slowdown
in emerging markets (EMs). The necessary deleveraging of the baby boomers
has far to go and this major structural headwind prevents QE alone from
returning the USA to “normal” levels of economic growth. Already there is
evidence that the rise in US bond yields is reducing growth. At
23x CAPE, US equities have a long way to fall once the supposed
safety net of QE is seen to provide no such security.
If QE is working, why is bank credit contracting?
q Since May 2013 US bank credit has contracted at a 3% annualised rate.
q In Euroland, bank lending to the private sector is contracting at 3%
this year.
q Lower exchange rates and higher interest rates spell lower growth in
emerging
markets.
QE has not made baby boomers borrow more and save less q The ageing
baby-boom generation (48-67) is saving more, borrowing less and
reducing debt as they head into retirement.
q Under-48s have too much student debt; and with balance sheets damaged
by
falling property prices, they cannot gear up to offset the baby
boomers’ delevering.
q Real personal disposable-income growth is at levels associated with
recessions,
bond yields are rising and inflation falling.
q Any shock to aggregate demand could quickly push us into a world of
sub-1%
inflation at a time when nominal interest rates are near zero.
QE cannot stop the EM cyclical slowdown and associated defaults
q Short of a developed-market consumer boom or even further major capital
inflows
to EMs, QE can do nothing to halt their balance-of-payments
realignment.
q QE triggered the emerging-market debt boom, but it cannot stop their
devaluation
or deflation.
q The emerging-market slowdown brings lower inflation and higher real
interest rates
to developed markets.
Treasury yields rise due to a lack of foreign central bank support q The
focus on tapering masks the role that foreign central bankers play in
pushing
US Treasury yields higher.
q Rising Treasury yields, falling inflation, contracting bank credit and
very high equity
valuations are a dangerous combination
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