The Value of Things
(3) ¹
Quantitative Easing (QE) has come to occupy a predominant place in the day-to-day operations and life of financial markets. Not a day goes by without comments about QE, positive or negative, whereas the mechanism has only been used on a large-scale basis by central banks since 2008.
The effects of QE have been mixed: the monetary strategy in Japan has without a doubt reached its limits and the central bank appears for the time being to have curbed in its temptation of “always more”. The ECB has put the European economy in intensive care and while the patient’s condition has not worsened its recovery is slow in coming. As for Janet Yellen(2), having initiated a delicate balancing act, she has been quietly trying to prepare markets for an inevitable return of US rates to normal levels once conditions permit,…
By looking at the major regions that have tested accommodating policies, the first observation supports the detractors: whether for Japan, Europe or the United States, while these innovative strategies were successful in increasing monetary mass, monetary velocity(3) has declined to such an extent – against all expectations – that the impact on prices was the opposite of what was intended. In contrast, when one looks at the prices of US companies, it may be deduced that the Dow Jones and Standard & Poor’s will have indeed profited from this abundant supply of liquidity. And yet to what extent? Or, to ask the question differently: “where would the markets be without the Fed’s aid?”
One way to answer this question would be – as two economists of the Fed recently did (4) – to simply calculate the performance of US markets by replacing the performance of Fed meeting days by an average performance for the period. The conclusion is astonishing: up until 1985, a market with or without a Fed meeting would have registered the same performance. Conversely, since this date, were one to replace performances of Fed meeting days by average performances, levels today would be 25% lower. The comments of central bankers clearly had an indisputable effect on market multiples: “In the beginning was the Word“… And at the end also!
A more precise breakdown of the period of observation highlights a pronounced effect for the 2008-2012 period. This makes sense: on top of the surprise effect of 2008 has followed an effect of size, given the massive scope of these policies. Since 2012, in contrast, the effect has considerably waned, no doubt reflecting the consequences of habit and fatigue of market players who now require increasingly frequent stimuli to react.
For us as investors this fatigue offers additional evidence for increasing our paranoia regarding the major winners of the QE policy, the excellent models of well-priced growth… At the same time, it also provides incentive for renewing interest in less popular investments, the “forgotten” beneficiaries of central bank policies, or put simply to take a new look at value investing opportunities so appreciated by our Anglo-Saxon friends.