Is QE blowing Australian bubbles?

Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified?

Chris Joye argues not:

The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to secure full employment and ensure that Australia’s trade-weighted exchange rate, and local economic conditions, are not adversely affected by the much more aggressive asset purchases of central bank peers overseas.

In contrast to the government’s COVID-19 fiscal policy package, the RBA’s QE via its liquidity operations, and its $180 billion Term Funding Facility, is not a temporary stop-gap.

This makes a third, six-month round of bond purchases, or QE3, a certainty in October, which is likely to be succeeded by QE4 next year and iterations thereafter.

There is no reason to think the RBA will be minded to taper those purchases from $5 billion a week until it has high conviction it will achieve its goals, which will not be until 2022 or 2023.

As governor Phil Lowe’s protégé and putative successor, deputy governor Guy Debelle argued late last year: “In the situation we’re in at the moment, the right decision is to err on too much support rather than too little support.

Contrary to countless hysterical claims … the RBA’s current QE program has no role to play in blowing asset price bubbles.

Buying five- to 10-year government bonds has no direct impact on local housing demand.

QE does work better in Australia than in the US to exactly the extent that Joye describes. US mortgages price off the 30-year bond so the Fed can directly inflate house prices with bond purchases.

However, it’s a bit silly to argue that the Term Funding Facility (TFF), also a form of QE, is not inflating asset prices. That’s pretty much the TFF’s only goal given it lowers bank funding costs below market.

Whether you see this as blowing a bubble depends upon your ideology. To my mind it is, given it guarantees a considerably higher stock of household mortgage debt over the next three years, which will directly result in the opposite outcome that the RBA wants to achieve in policy normalisation. On the contrary, it will lead only to more TFF and negative interest rates in the next shock.

The other question is whether QE is leading to either bond or stock bubbles. Again, it depends. My view is that bond markets are reacting to structural lowflation and central banks are largely reacting to that, though they are certainly making it worse by relying so much on further rounds of debt issuance.

Stocks are a better category for a bubble with the ASX valuation very stretched for a bourse with no underlying profits growth. But even this can be defended in certain contexts if your valuation metrics are influenced by the low level of bond yields.

In conclusion, the RBA’s buying of Aussie bonds is not blowing asset bubbles directly though stocks are inflated by it indirectly. The RBA buying bank bonds is absolutely blowing bubbles.

Which is what it does best!

David Llewellyn-Smith

Comments

  1. I’ve just finished putting together a presentation for my clients on the outlook. The RBA seems to be wilfully blind to what’s going on and their role in it. When you look carefully at the SoMP, it’s all there…

    One of the key mistakes they are making is to treat the recession as a normal market-driven one, when it’s not. Their labour market forecasts are, simply, wrong.

    • happy valleyMEMBER

      But purposely so – the only out come the RBA happy clappies are interested in are blowing asset price bubbles to the moon, driving further wage slavery and annihilating savers and retail depositors.

    • The consequences of lost income for the most part haven’t arrived yet.

      Lending is perhaps very lax already. Is IO back?

      • The Penske FileMEMBER

        My little part of the finance world is showing home loan lending and refinancing to be steaming ahead. Many groups doing record month after record month. Business lending and private lending is quiet heading towards dead.

    • Arthur Schopenhauer

      In what way are the labor forecasts wrong. Less employment, or more?

      From recent experiences, as long as the borders remain closed, unemployment will remain surprisingly low.

    • They know exactly what they’re doing, which is blowing the house price bubble to benefit the wealthy. I envision them sitting back in their comfy offices and expensive suits and laughing like drains at the gullibility of the great unwashed.

    • “Their labour market forecasts are, simply, wrong.”
      and when does being wrong, year in year out, stop getting reported as mistaken and properly labelled propaganda? or lies, as per Draghi’s quote?

    • Strange EconomicsMEMBER

      The ASX trades on a higher PE than the US. And half of the ASX Capitalisation is 4 big banks, bubbled up with QE.
      Why would you buy the ASX?
      Unless you are a Super fund manager getting 1Mill a year to buy CBA shares. Brilliant. And with the 1 mill a year I’ll buy a 5 million dollar house !Brilliant. And why don’t they buy shares themselves?
      Then again, houses trade on 40 times PE, makes the ASX look cheap.

  2. kierans777MEMBER

    > Is QE blowing Australian bubbles?

    Yes. QE is about driving people into non cash assets. Therefore bubbles.

  3. Australia Day 2021

    The whole point of QE is to at a minimum keep asset bubbles inflated. I’m sure they’d prefer to not create asset market manias since it creates more instability, but if there is a mania then it will certainly benefit the wealthy and powerful.

    Excess money moves in one direction to the wealthy and powerful.

    • The whole point of QE is to at a minimum keep asset bubbles inflated.

      The powers to be talk about QE supporting the economy which should be about keeping people without jobs afloat and supporting businesses impacted. It should not be about watching and cheering that support get directed into inefficient, asset bubbles. But hey, this is way!

  4. pfh007.comMEMBER

    So he thinks the RBA buying bonds is a good thing?

    Knock me down with a feather.

    “.. He is a portfolio manager with Coolabah Capital, which invests in fixed-income securities including those discussed in his column..”

  5. There’s no real estate bubble.

    Also – I met a bloke pulling beers yesterday who’s just borrowed money to build an $800K house. Definitely not bubble material and completely normal.

    • But the problem is – as mortgages become more affordable (depending on LVR and cash available to support the debt) people will bid on property like no tomorrow thereby sending prices up quite rapidly and then the affordable becomes unaffordable!! There’s no way that wages/salaries would keep up with a rampant property market!!

      • Which leads us back to where we were 15 months ago pre-pandemic and pre-Scomo/Fraudenberg bailout

        Eventually, the debt machine will draw in more and more income and the rest of the economy slowly dies out.

        If this sustains itself for any length of time, then Aussie House Prices truly are truly a miracle of a Jesus-esque magnitude

        1) Incomes will not grow significantly (if you disagree, let me know where this will happen)
        2) Immigration is dead for at least another 12-18 months, and firing it back up will see significant voter unrest (just read the comments section of the MSM when anyone tries to be a booster. The jig is up)
        3) Bludgekeeper, loan deferrals, rent deferrals, Super cashouts all gone at some point this year
        4) Insolvencies will have to be dealt with
        5) Interest rates fell by less than 1%

        Happy to be proven wrong but this just seems like a temporary blip before we fall again

    • Well the house will be worth 100K more in a year , and 100k more the following year , forever.r. He only needs to pay 20K interest from working in a bar,.

  6. You know that scene in “The Big Short” where Mark Baum finds out the stripper has 5 investment properties and quickly concludes there’s a bubble?

    Well, I have a friend that is an airline hostie with Qantas and she is asking for advice regarding mortgage brokers because she doesn’t quite have 10% deposit for a 2br townhouse and the bank is trying to steer her towards a new build (off the plan) some place “further out”.

    Draw your own conclusions.

  7. According to the latest RBA chart pack broad money is starting to take off here, but it takes more than QE to kick in inflation, you need continual fiscal action as well. Especially early on in their mortgage people can’t use their house to eat and play and houses are all that is happening here while everyone waits to see what the virus has up its sleeve.

    https://twitter.com/LynAldenContact/status/1358067930286743552

    They are working on it overseas but as long as China needs us we won’t have to get too extreme here unlike others.

    • Not necessarily fiscal action, just ‘real’ action. The new money needs to be directed toward GDP transactions not financial transactions. Fiscal policy is one way to achieve this. Another way is for banks to lend to businesses for productive investment.

  8. Goldstandard1MEMBER

    Title is retorical question of course.

    CJoyless has no place commenting on the ponzi. His predictions are only mostly right BECAUSE QE blows bubbles and the gov is all in. However the party is over sooner than people think. IT’s only fine whilst people pile in.

      • Goldstandard1MEMBER

        Could not be too. I am simply saying that people putting it ALL on the line via high debt exposure in this environment is very dangerous vs the chance of missing out.

  9. Just because Australian labour is globally worthless we shouldn’t jump to the conclusion that our assets are globally worthless.
    Our assets have undeniable global value, and it will double in price once our most valuable assets are pried from the greedy fingers of the Boomer generation.
    But our Labour will still be worthless making any ratiometric comparisons between Labour and Assets a complete waste of time.
    For QE to work (in the way the RBA wants it to work)both our individual and collective labour needs to have global valu. The enterprises that we create with our labour need to have enduring value but that’s not where we’re heading. So instead QE makes our politicians and RE developers rich while it improvises our nation. But just to be clear this is not a new situation, it has occurred time and again throughout history
    Rich nations that can afford to do anything but they choose to squander this wealth rather than invest it in themselves.
    This happened in Turkey during the late 19th and early 20th century (the Ottoman empire was fabulously wealthy) they could in theory do anything, make anything, but they chose not to. Well they didn’t exactly choose, rather their economy made the decision for them, they simply couldn’t afford to deploy their own labour in any externally Productive manner. All local labour became 100% focused on fulfilling local needs, but not just local needs, rather only those local needs that couldn’t possibly be supplied from outside. The whole economy buzzed along famously until one day they discovered that they needed guns and war ships and armaments but as it turns our their traditional suppliers for these items was now their emerging enemy.
    The Ottomans quickly re-sourced all kinds of Military equipment and felt safe, but then they discovered that their newly acquired equipment was faulty and they lacked the skills to even fix it.
    So naturally they tried a different supplier ….and a different supplier …and a different supplier.
    By the time the real shooting war started their army and navy were equipped with a hopelessly mismatched hodgepodge of faulty and incompatible equipment. They of course made the decision to move all the production for military equipment back on shore, but produce what? Produce compatible replicas of every stupid half functioning weapon that their forefathers had purchased, of course not that would be a silly decision.
    So they started with a clean sheet of paper, a clueless workforce, inexperienced engineers, incapable managers, overly ambitious politicians and about a quarter the required capital….a receipt for success if ever their was one NOT!

    • Jumping jack flash

      If i understand correctly you want Australia to make things?

      Making things is far too hard and environmentally damaging.
      Debt is just easier and much cleaner and safer. What is easier than waiting around for someone to borrow a colossal pile of debt and hand it to you? You use their debt to pay off your debt, plus interest, and keep the change to do whatever with.

      It makes far more sense to let debt inflate our debt economy in perpetuity, let China make everything we need, and then we easily achieve our net zero target by 2050.

      Then if we want to, we use all our debt to create carbon offsets for China. Or we put carbon tariffs on their products to do that.

      Its so easy, and guilt free.

      • It’s not so much about making things as it is about maintaining capabilities.
        In this day Factory Automation understanding is far more important than Line worker “Productivity”
        So we need to be capable of creating Automated factories, this capability is both an individual human skill and a collective societal skill. Sure the best way to perfect this skill is to simply Make Stuff but failing that we need to at least know how stuff is made.
        But in the end this is all as pointless for us it was for the Ottomans,
        In Australia today we produce more Financial Engineers than Electrical Engineers, and what’s more disturbing is that at least half of our EE graduates will end up in Finance within 5 years of graduation. I’d probably be more impressed if I didn’t understand what a “Structured Financial Product” actually is, yet this is what our best Engineers are busy creating, designing, optimizing …perfecting.

      • There’s an interesting emerging trend in cars to make them impossible to repair without the Manufactures help.
        This takes the form of Communications within the car verifying that all parts of the car are working and functional and authorized.
        So if you want to add an instance upgrade by simply getting the special part from a wrecker and putting it on your cheaper car, well you’re sol, because the car’s computer will refuse to connect to the newly added item.
        Fair enough you might say but the same applies to say replacing a damaged side mirror with a mirror sourced from a wrecker you’re also sol.
        Now what happens if this same logic extends to our military equipment. What happens if we can’t simply repair an item, if we can’t replace a break pad, if we can’t change the oil, if we can’t fix a broken…
        You might say that’ll never happen but I’m telling you that it’s happening as we speak and our so called leaders are hopelessly behind the curve.
        What happens to our newly acquired military capability when the supplier refuses to allow us to make repairs or better still has some undeclared lock out feature. This is where we are heading and the politicians steering us down this path are as clueless as they are corrupt.

    • Thank you. Turkey = a perfect example of a ‘Distorted Production Structure’ (Friedrich Hayek) that leads to long-term national impoverishment with calamitous capital misallocation. Australia is not the only current day example. The Fed is currently destroying the West.

    • Ailart SuaMEMBER

      “and it will double in price once our most valuable assets are pried from the greedy fingers of the Boomer generation.”

      It amuses me whenever I read the many derogatory statements regarding this particular age demographic. How does the song go – ‘every generation blames the one before’. I’m a boomer, but most definitely not a greedy one. I think a lot of the venom directed at boomers stems from the overly generous tax-breaks and concessions the boomers were gifted; primarily from the Howard government.

      Maybe if you put a bit of thought into the reasons why this occurred, then asked yourself; if your generation was offered similar tax-breaks and concessions, would your generation knock them back? We all know, or should know, that our 2 ‘take-it-in-turns’ governments target and ‘purchase’ votes from various segments of the populous. The larger the segment, the larger the purchase price. You are probably aware that the baby boomer generation is by far the largest in modern history and has been the recipient of government ‘voter bribes’ for many decades.

      I understand your frustration, but your boomer anger needs to be directed to where it belongs – at the LNP, the ALP and their elite donor cash-cows.

      • My disgust for Boomers (Aussie Boomers in Particular) stems from the fact that they haven’t invested properly in their Kids education. Sure everyone gets to go to university but lets be honest that’s not an investment in capability rather it’s the excuse they tell themselves to disguise their own greed, it might work as self delusion but hopefully you will excuse me if I don’t share in their deluded story.
        The underinvestment in Australia’s youth has reached chronic proportions and this exacerbates our inability to create sustainable value through our collective labour. What should be a time of patient capital underwriting a generational employment transition has become nothing more than a scab grab.
        F’ing boomer generation disgusts me, fortunately death cures all and with each passing year they get one step closer.
        Btw if you think I hate Boomers you should have a yarn with my kids.

        • Ailart SuaMEMBER

          “Btw if you think I hate Boomers you should have a yarn with my kids.”

          If they’re your kids, they wouldn’t have a choice, I’d imagine. Did your parents happen to be boomers?

          We do agree on one thing – the education of Australian citizens is appalling. But that has zero to do with boomers. Again, it’s governments, the system they’re installed with and donor influence that’s responsible for education – and that’s where your disgust should be directed.

          “F’ing boomer generation disgusts me, fortunately death cures all and with each passing year they get one step closer.”

          That statement strongly indicates you have a problem that needs to be addressed.

          • How should I read this
            it’s not me that’s bad it’s the people I vote to represent me that are terrible people.
            Is that right?
            Do these “representatives” command you to cheat the next generation?
            Do they tell you that an Investment in some LNG plant is good while an investment of time and money to deliver a outstanding Apprenticeship experience is bad.
            What about when you decide that simply shutting down an “unprofitable” but systemically important training business (lets say Automotive) is a solution. A solution to what? we were one of less than 10 countries in the world with the capability of doing car design from beginning to end and all steps in between. Yet suddenly it’s gone and we celebrate a couple of extra dollars in some column in a spreadsheet while a complete industry dies.
            Making Real Investments is about more than money, it’s about strategy, legacy, preparedness, education and a willingness to achieve a sub-optimal dollar return because these other attributes are more important.
            But I don’t want to burst your bubble, however when you end up in a nursing home where some young lad swaps sand paper for toilet paper maybe you’ll think back about the absence of breadth in job choices created by your generations stewardship.

  10. reusachtigeMEMBER

    LOLOLOLOL! For how long have people been claiming there’s a bubble? No, it’s just normies doing what normies do and that’s booming things.

  11. Goldstandard1MEMBER

    Title is retorical question of course.
    Bottom line is that it’s all hanging off unsustainable debt levels that are now deemed too big to fail which is why the gov didn’t let loans get called in. Now what? That’s right, eventually they have to. Not only are ppl not heading the warning, they are swimming straight into the rip.

  12. Can someone tell me whether one can draw down on a mortgage facility for things other than those related to improvements on/extensions/development of the underlying asset? Seems to me that if can use a mortgage loan for things like holidays/cars/living expenses then the original purpose of the loan is self defeating.

    • What you do with the money is your business. As long as LVR and repayments are acceptable to the bank you can go blow it all at the casino if you want.

    • Not if recycling the mortgage funds only costs you 2% or so, against 12 to 20% via credit card, to have that holiday.

  13. Jumping jack flash

    “That’s pretty much the TFF’s only goal given it lowers bank funding costs below market.”

    This explains everything.

    Super cheap debt “COVID stimulus” = an unprecedented surge in debt.

    That part is completely expected.
    It is the next step that is unknown and that step requires prayers to the gods of debt and constructing ittle shrines to Phil. Light some candles and sing some praises!

    The next step depends on whether there is enough debt growth to cause enough CPI and cause wage inflation.

    Wage inflation has stubbornly remained absent from their plan for over 10 years. Replacing it with wage theft couldnt work. It didnt work. It just wrecked everything, slower.

    This time we have an almighty, globally synchronised effort to initiate the perpetual debt machine. Will it work? We will see.

    The signs will be a tidal wave of debt spawned from leveraged COVID stimulus. It will be leaps in CPI and then, if everything works as they hope, wage inflation will return!

    This is the start of debt hyperinflation. It is absolutely required. Nobody could endure the slow melt strategy they were trying before this.

    Wages will leap. Prices will leap. And most importantly, debt will leap.

    • But ! I suspect that that debt is in the stead of wages and salaries that were not earned, cash that was not transacted in shutdowns. Its a bit new.

      • Jumping jack flash

        In some cases definitely.

        In many cases no. The stimulus is far greater than what is required, and that’s done on prurpose.

        For instance, in Australia if you extend a line with the same slope on the debt volume chart at the point from the late 2000s (when the economy was chugging along and everyone was happy) and debt was growing at the correct rate to induce wage inflation, to around 2017 or 2019 when everything was well on its way to falling over, then it is clear that there was a shortfall of debt in the economy of around 600 billion. Give or take. And i understand that’s very rough but it makes sense.

        In my opinion it is no coincidence that the total covid stimulus so far was in excess of 600 billion dollars, and suddenly everything is working again!

        I reckon that this is something, and i reckon that the 2 trillion US stimulus figure wasn’t just plucked out of the air, i reckon it represents the missing debt growth over the entire period since the GFC!