Last Friday, there was a charity lunch in Edinburgh. It happens every year to raise money for The Prince’s Trust Fairbridge programme, which supports disadvantaged young people.
This year, we persuaded American author and publisher Bill Bonner (who owns MoneyWeek), and the FT’s assistant editor Gillian Tett that they’d really enjoy a day out in sunny Edinburgh. It rained. But they didn’t seem to mind – much.
Bill is an ‘end of the worlder’. He invests in gold and ranches in places governments can’t reach. But he has also called the great financial crisis just about right over the past decade, and if you were to have recorded and listened to both talks later, you would have found very little disagreement between the two of them.
Gillian isn’t a permabear like Bill. But she is a realist. So when the main discussion ended up being about how on earth the Fed gets itself out of its quantitative easing (QE) corner, the clear answer was that it probably can’t. The best possible outcome would be that it could slowly stop the amount of new money going in – from $85bn a month to zero over a year or so – and leave it at that. Then it would hope to get away with hanging on to all the assets it has bought so far and letting them expire peacefully on the balance sheet. That would take six or seven years. Problem solved.
It doesn’t sound that hard, does it? But it is. If you’re in any doubt, have a quick look at your portfolio. If you were planning on retiring on the basis of its valuation on Monday, you might have been having a rethink by Friday. All poor Ben Bernanke – who presumably doesn’t want to be remembered as the man without an exit strategy – said at the Federal Open Market Committee (FOMC) meeting this week was that, if the US economy continued to look like it was improving, the Fed would start to look at doing the above. Everything slumped spectacularly, just as it did the last time he thought such things out loud.
Equities, bonds, energy, gold, emerging-market currencies, grain prices – you name it, you lost money on it.
The key to this is remembering what QE was supposed to do in the first place. It was supposed to keep the money supply steady, and it was supposed to shove all asset prices up to keep people feeling happy and wealthy. It worked really well. The Fed created money and bought assets; the people who receive that money bought different assets, and everything went up. But the very fact that it worked so well makes it perfectly obvious that its withdrawal was always going to have an opposite effect.
If there is no reason to buy anything except that Ben is buying it too, you stop when Ben stops. Or if you can, just before he stops, or says he is going to stop. Success in the markets now is all about guessing what the Fed might do next, or guessing what other traders think the next bit of economic data might say and what they then think Ben might do as a result. It’s like Kremlinology in the 1980s.
So here we are, stuck in a world where good news is bad news. Any new hint of economic recovery in the US might bring the end of QE a little closer and cause markets to fall further. Any hint that things are going badly might make markets recover, because Ben – or whoever follows him – will print more money. See what a mess we’ve made of everything?
The only good news I can think of to give you is that, whatever you might think about the US economy, the news elsewhere is awful. In the UK, we have fixed neither our banks nor our housing market. Most of the things the bears have been saying on China – it has a credit bubble, its shadow banking system could crash, it is a disaster of over-investment and so on – are looking about right. And in Europe, I can give you one number that will sum things up for you: car sales in May hit a 20-year low. No happy talk there.
You may be wondering what to do. The first thing is to buy things that offer value and cope with the volatility. The second is to note that, out of the chaos, there is one standout bit of clarity: as Denis Gartman points out in his Gartman Letter, there is now a “very clear delineation” between the policy of the Fed (desperate to exit QE) and the Bank of Japan (bold enough or bonkers enough to be planning a QE spectacular). “Can there be a clearer mandate for a weaker yen” and a more competitive Japan? Probably not. So here’s a positive spin on the week – it’s a buying opportunity in places that might offer long-term value, of which Japan is still one.
• This article was first published in the Financial Times.