Like many investors, it seems, we were flummoxed by Ben Bernanke’s QE3 announcement last week, which essentially promised to keep rates ultra low, buy $US40 billion of mortgage-backed securities per month, and do whatever else it takes for eternity until US unemployment figures return to their pre-crisis levels.
Was it overkill? Probably. Was it reckless? Possibly. Will it work? Nah.
Still, unlike many investors, it seems, we were equally flummoxed by the reaction. Markets just aren’t taking this for what it is: free money! Forever.
As economic prognosticators, it’s our job to be the miserable permabears, not yours. And as signed-up members of the doom-and-gloom brigade, it’s our job to point out the risks, not the market’s.
But this market, after a brief and ultimately underwhelming rally on Friday that tapered out Monday, has put on the bear-suit and as such might put us out of a job. All a bit ironic when you consider that Mr Bernanke’s stimulus was designed to keep people employed.
Markets were concerned that the Federal Reserve was addressing a structural problem with a cyclical policy tool. Markets were also concerned that by providing an open-ended guarantee, the ultimate signal had been given to feckless Wall Street fat cats to double-up on moral hazard. Ben Bernanke was a hirsute Alan Greenspan by a different name and he was spiking the punchbowl.
But this gives a reason to buy, not to sell. Sure, the risks are still there, nothing has been properly addressed and the global economy is still woefully imbalanced, not to mention slowing, but without any trigger point save a wildcard in Iran or an upset in the Chinese leadership transition, there’s nothing in the short-term that should stop PE averages expanding from 16 to 20 to beyond. Risk is on.
Now of course, there is the small matter of China’s economic slowdown, which may claim its first victim in Fortescue if banking deals and asset sale don’t assuage the short-sellers, and there is the equally small matter of the US Republicans and their desire to follow Europe’s march to fiscal austerity, but when the music is playing you’ve got to dance.
So dismiss those worries in the Strait of Hormuz or the South China Sea. Don’t be afraid of food inflation, climate change or energy prices. Forget the fact that rich-world unemployment is structural, the results of a labour market that has failed to catch-up with the reality of globalisation and technological obsolescence. And forget too that the same problems exist for Chinese workers, only more so.
Dismiss from your minds the futility of driving an economy built on debt into a cliff of the mass retiring baby boomers. Cast aside nagging thoughts of hung parliaments, poisoned politics and a legislative process run more by the media cycle then the commonweal. Don’t worry about the rescue deal in Europe that essentially ties bailouts to privatisation and the sacking of public sector workers.
Our national symbols may be the emu and kangaroo, but in this bull market we need to be the squirrel and the ostrich. Free money has been given and as net present values are put aside to the broom closet of financial analysis, we must buy up all the nuts we can and put our heads in the sand.
After all, the view is better from underground and when the rally fades you’ll need all the nuts you can get.
PS: None of this constitutes investment advice. Please see a financial planner before doing anything.
Michael Feller is an investment strategist at Macro Investor. Macro Investor is continuing its coverage this week of the best trading and investment ideas to take advantage of QE3 and our changing economic landscape. Click here for your free trial.