Should We Feel Uneasy Over Quantitative Easing?

Most of us would agree that a bit of extra cash would help to solve a problem or two. Central bankers, clearly, thought so.

After nearly a decade of quantitative easing (QE), the world is awash with cash ‘printed’ by central banks to stave off economic malaise. More than $15 trillion of new money, in fact. An amount so large that is difficult to imagine – it is roughly equivalent to seven times the combined value of every home in London.

Has that solved the world’s economic ills or just stored up problems for the future?

On one hand, major economies have stabilised. Most are growing, albeit, not quite as strongly as before the financial crisis of 2008. Meanwhile, asset prices have increased significantly. It could be said that QE has done its job.

But many people are not feeling flush with cash. Those left behind by the recovery are expressing their dissatisfaction at the polls. Gains made by populist candidates globally are testament to that.

What happens when central bankers decide the time is right to remove this extra cash? Will the foundations of the upturn in equities and the economy be destroyed?

A post-mortem of the last financial crisis laid much of the blame on excessive debt. Today, access to cheap credit designed to stimulate the economy has, perversely, helped to boost borrowing to record highs for nations, companies and individuals.

Economic theory contends that a tighter monetary base should, all else being equal, reduce the availability and affordability of credit. That creates a delicate task for central bankers eager not to unduly disrupt the economy by squeezing up the cost of borrowing.

In the US, the Federal Reserve has already begun QT (quantitative tightening) – the process of removing QE. Eyes are now turning to the European Central Bank which has signalled its intention to cease printing new money by the end of 2018 – a precursor to the eventual removal of stimulus. The Bank of Japan will likely follow further down the line.

After a decade of QE, the world has become accustomed and, perhaps, immune to it. The economic system appears to work while there is cheap money, but less certain is what happens when the music stops.

Many of the biggest gainers since QE began were the most speculative investments – from Bitcoin to the FANGs. To us, those investments look most vulnerable in an environment with less easy money. The good news is that such distortions inevitably create opportunities to buy companies that have become overlooked and undervalued. We see such situations in oil and retail. Unfortunately, we cannot print money, but we can seek out the opportunities that we believe are best positioned to benefit when attitudes to risk change.

*28 June 2018

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