Fast forward five years, and Ben Bernanke’s QE is the gift that keeps on giving, keeping the global economy inebriated with the Fed’s $85bn-a-month cash injections. Problem is we could be in for one hell of a hangover in the New Year if we taper too much on our medicine, or even eventually go cold turkey.
So can the global economy stand up straight without its QE crutch? And what has been the real impact of five years of money printing?
Simon Ward, chief economist at Henderson Global Investors, believes QE has actually had very little impact on economies, but a big impact on markets.
“QE, contrary to expectations, has not boosted the money supply significantly,” he says.
“By money supply, I mean the stock of money held by households and firms. QE has injected reserves into the banking system but banks have not responded by expanding their balance sheets, so the liquidity has not filtered into the economy.”
QE bond purchases have, however, he says artificially suppressed long-term yields, which in turn has boosted equity and property prices. However, this boost is liable to unwind as the flow of QE money slows.
Mispriced markets
“I think the central banks were right to do QE amid the crisis in 2009 but the later rounds have caused financial markets to become mispriced without stimulating the economy,” Ward adds.
Looking ahead, consensus says tapering will be begin in March, or perhaps ‘Tapril’, and that by the end of 2014 the Fed’s bond purchase programme will be fully unwound.
Neuberger Berman’s investment strategy group believes the implications will likely be higher interest rates and a stronger dollar, accompanied by improvements in growth and employment which could favour equities relatives to bonds.
“Judging the timing of tapering could be perplexing: payroll data, inflation, the recent debt ceiling debate and imminent replacement of the Fed chairman all could be potential factors in the central bank’s decision making,” the team said in its latest Strategic Spotlight.
However, Neil Williams, chief economist at Hermes takes an opposing view – central banks dare not for some time yet remove “the tide of liquidity still needed to cover up the sharp rocks beneath”. While the US recovery has legs, he believes the UK and eurozone are “half way to a lost decade”.
He adds: “With demand-inflation tame and the ‘tool box’ empty, the G5 is still too vulnerable to be taken fully off its policy steroids. This means: with more cheap cash looking for a home, growth and inflation assets should remain supported.
Running from 'taper-gate'
“It has been telling how quickly international central bankers have distanced themselves from ‘taper-gate’. In the UK, forward guidance is an experiment that could backfire if credibility is stretched. In which case, QE will be switched on again. The irony remains that QE is being done least where it is needed most – the eurozone.”
As investors, it may be hard to define exactly what we have learnt from five years of QE, or indeed what we can expect to see without it, given the unprecedented nature of the cure (the total injected by the Fed since 2008 is not far off $4,000bn).
Fears of QE feeding rampant inflation have, as yet, not been realised with prices remaining relatively well contained.
“In short, it has been a highly favourable period for investment returns, yet it has, at the same time, been a distinctly mediocre period for the global economy,” says Alexander Friedman, global CIO at UBS Wealth management.
“This disconnect is now leading some to question whether QE’s reflation of asset prices represents the creation of a bubble [in risk assets].”
He actually believes we are unlikely to be in bubble territory, though the message to investors is clear: “Ultimately, all that long-term investors should truly care about is whether such sentiment has pushed valuations beyond reasonable levels.”
