"Is QE unquestionably supportive for risk assets? I think not."
From Bond Vigilantes:
We have written about quantitative easing (QE) many times over the
years, yet there remains more to be said: the great QE experiment is not
yet over. Given the result of the EU referendum, speculation is rife as
to whether the Bank of England will embark on another round of QE to
stimulate the UK economy; arguably making this a good time to debate the
efficacy of such strategies.
It’s safe to say that the most surprising aspect of QE has been the
lack of inflation, but central banks which have undertaken – or are
still undertaking – QE claim that it has worked by preventing deflation
through portfolio rebalancing. The
shift in funds into riskier assets has led to higher stock markets. My
take on this? Central banks are over exaggerating their claims at best,
or grabbing at straws at worst.
Let’s take the US model experience as an example. I agree that the
Fed’s balance sheet and S&P 500 index have been positively
correlated since 2009, but I would argue that the relationship is
casual, not causal. The Fed announced its QE programme only after US
stock markets had collapsed to cheap levels, and stopped it only once
those markets had recovered. As such, the Fed seemed to use the S&P
index as a temperature gauge for the economy (“the share price of the
country” as it were), rather than the index appreciation being the
direct result of the QE activity undertaken. QE started when stocks were
cheap, and finished when they became fair value.
Not yet convinced? The above chart demonstrates a coincidental
relationship, but what about other economies? The QE experiment in
Europe was initiated in March 2015, a time when the Stoxx 600 equity
market was much more buoyant, and not trading at distressed valuation
levels. It seems ludicrous to argue that a causal link has been in play
in Europe....MORE
HT:
FT Alphaville's Markets Live