Earlier this year, for a brief period, it looked as if America might be in some kind of recovery and so would need no more QE; as if eurozone leaders were beginning to grasp the enormity of their situation; and as if the great bear market in equities might be coming to an end. Unlikely as it sounds, I even have a vague memory of writing a vaguely optimistic article myself.
It’s over now. With the arrival of ‘QE infinity’, it is clear (surely) to everyone that our politicians are making it up as they go along – and the bears are back on form. Policy these days, says Peter Bennett of Walker Crips Stockbrokers, and that of QE in particular, is like “an army on the run”. The generals “get the troops to spray bullets at random in the rough direction of the enemy and pray one or two hit”.
It is an approach that not only means the retreating troops are regularly hit in error (think of the way in which near-zero interest rates slam the incomes of our pensioners), but which also provides us with endless market distortions. It gives us US equities that are 50% overvalued on long-term valuation measures.
It has produced a bizarre bubble in both ‘safe haven’ and junk bonds (note that the yield on US junk bonds is at its lowest rate ever, despite the fact that this year’s default rate is running at 24%). And it denies us the ‘creative destruction’ vital to capitalism: while we are devoting all our energy, time and money to “propping up rubbish, we can do little else”, says Bennett.
One of our other gurus, Dylan Grice of Société Générale, is just as unimpressed. QE Infinity isn’t just debasing global currencies, he says, it is debasing our society. At its most fundamental level, “economic activity is no more than an exchange between strangers”. It depends on trust between those strangers.
And as money is the agent of exchange it must also be the agent of trust. Debase it and you debase trust. Let’s not forget that “history is replete with Great Disorders in which social cohesion has been undermined by currency debasements”. Might we be headed in the same direction?
Marc Faber, publisher of the Gloom, Boom and Doom newsletter, thinks so. Last week he announced that, while he was pleased to think that QE Infinity would be good for his assets in the short term (he’s been buying European equities and thinks there is some value in China), he also thinks that neither Bernanke or whoever comes after him will ever stop the money printing now. He is also convinced that everyone, from the Europeans to the Chinese, will soon be printing too.
The result? “The monetary policies of the US will destroy the world.” If you want to hear more from Mark Faber you might wish to attend the Halkin conference in London on 18 October. He’s speaking there alongside our own Bill Bonner (see Halkinservices.co.uk for more details). However, I’ll also be interviewing Faber on the day so you’ll also get another dose of bearish fury from him in the magazine in late October.