The Rise and Rise of Central Bank Dependence on QE
"QE will go on forever and it's going to mean a very long and powerful bull market for stocks," the former chairman of a major trust bank in New York told me today over lunch. He was articulating a growing theme you hear these days among some investors-- bowing to the powers and authority of the Federal Reserve Bank-- which is using its balance sheet to maintain a low interest rate environment and so to make more valuable than government bonds the shares of public corporations and the value of residential homes. This sentiment could be underscored in Tokyo today after the Bank of Japan disclosed it would copycat the Fed-- and double its monetary base and holdings of Japanese government bonds over the next 2 years. Talk about playing catch up ball. It took the Fed 4 years to triple its balance sheet-- and it's clearly not through yet. The Japanese must think QE will spike its long suffering stock market; indeed the Topix, a Japanese index, is up 20.3% over the past 3 months, Some positive action finally. China, as well, desperately trying to fend off a slowdown that could lead to social unrest, has already increased the money supply by 60 trillion remimbis, the equivalent of $10 trillion dollars. This $10 trillion in Chinese currency means that over the past 4 years monetary credit in China has ballooned to 116% of Chinese GDP. That beats the Fed's marker for assets held and suggests the Chinese better read their Ken Rogoff findings that a high amount of debt in relation to GDP translates into a slower rate of economic growth. The trend is clear; central banks are using their muscle in a prolonged attempt to bind up their national economies by driving up asset prices, most especially common stocks. In the short to medium period, the momentum is picking up worldwide to follow this guideline-- which has never been attempted for such a long time period by many nations at the same time. To my way of thinking it would be more dangerous to cease and desist from QE than to keep this unconventional cooperative policy making going without a fixed finish date. My old friend Christopher Wood, who writes the GREED & fear commentary for CLSA in ASia, captured perhaps the worst unseen danger, when he wrote "The sheer prospect of an exit from quantitative easing would cause such trauma in equity and credit-related markets that the most likely consequence would be that the exit never happens until it is forced by market circumstances. And that sort of crisis probably means the end of the fiat paper currency system as currently constituted." That last sentence is uncomfortable for even to write. But, I have to tell you that Wood predicted the collapse of Japan in the 1990s before it happened-- and was quite conversant with the dangerous deterioration American banks before they became insolvent and had to be bailed out. So, a fair warning.