INFORMING YOU - JUNE 2013
There is no doubt that markets have become addicted to Quantitative Easing (QE), a phrase that did not even exist before 2008. QE became the chosen route for most western economies to try and minimise the damage from the financial collapse. In essence it is the same as printing money, although in the UK the money created has gone mostly into bank coffers as they try and boost their balance sheets. It has artificially kept interest rates low which should be good for borrowers except that in the UK banks have hardly been lending, and of course it has been bad for savers which mean that in the UK we have had the worst of both worlds. In the US, QE has been more effective as banks have actually been lending.
There are two distinct schools of thought as to how the QE experiment will end. Historians believe that it is almost inevitable that inflation will result, as has been the case in other occasions when countries have printed money. Others suggest that the damage was so deep rooted that there is every chance that the federal banks will get the timing right as there is little inflationary pressure around at present either from wages or commodity prices.
Which of the two beliefs will prove right? Who knows, but I have been trained to worry when people say "this time it's different" as it very rarely is!
One thing that everyone knows is that at some point QE has to end. Last night Ben Bernanke, the Chairman of the Fed, announced the US may phase out stimulus possibly starting later this year and ending in the middle of 2014 as the US economy is well on the way to recovery. If you were a patient in hospital and your consultant felt you were well enough to be taken off your drugs as you were nearly back to normal you would be ecstatic, but not the markets. Like addicts, worried where their next fix will come from, markets have reacted with panic with bond yields rising and stockmarkets falling. This is just on the news that QE may start to be withdrawn in six months' time.
When QE was introduced markets hoped it would be a temporary measure, but now the addictive nature of the treatment has taken over. In the weird Alice in Wonderland situation we find ourselves in, it would appear that if Bernanke had said the US was in a bad way the markets would have rejoiced as it would have meant they could look forward to yet more QE being injected into their systems. So I believe that like an addict stockmarkets will have to go through a period of cold turkey before getting back to normal.
There will be good and bad days in the months ahead so I fully expect volatility to rise and would not be surprised if markets fell in the short term. In the movies addicts often get locked in a darkened room until their bodies get over the craving, and for your own sanity it may be wise to do the same with your investments and only look at them once the detox is complete. However, as soon as markets realise that life is actually better without artificial substances the better, as the future is far rosier than some would have you believe, and the growth prospects for the medium to long term, particularly in the US are very compelling.
As to whether inflation will come about or not, history has shown that in inflationary environments owning real assets is the key to protecting your wealth with the stockmarket being one of the best ways to avoid seeing your capital erode in the long term. Holding too much in cash and fixed interest stock is guaranteed to lose capital and investors in the latter category may find that only real drugs will help with the pain.
For and on behalf of Alan Steel Asset Management
Authorised and regulated by the Financial Conduct Authority