The devil collects on his deal

Quantitative easing just postponed the pain of the 2008 crisis, says Merryn Somerset Webb. And quantitative tightening could make 2018 look almost rewarding compared to 2019.

928_MW_P03_Contents

A Faustian monetary pact

"Rising interest rates and quantitative tightening (QT) are not the problem. They are the inevitable consequence of the problem. The Federal Reserve made a deal with the devil to postpone the necessary pain when it cut rates to zero and launched QE (quantitative easing). The devil has finally showed up to collect. Welcome to hell!" So said US analyst Peter Schiff in late December, as Fed boss Jerome Powell declined to produce any Christmas cheer for investors and it became clear that, barring a miracle, US stocks were about to see their worst December since 1931. But if Schiff is right that QE just postponed the pain of the 2008 crisis might QT make 2018 look almost rewarding next to 2019?

The latest note from James Montier at US asset manager GMO suggests it might. US valuations in particular are so high, he says, that "to believe that US equities are going to generate a normal' return from these levels, you have to believe some quite extraordinary things". That profits will rise far beyond today's already extended levels (see my analysis here for more on why this could be possible); that price/earnings ratios will soar to levels above those at the height of the technology, media, telecommunications (TMT) bubble; or that growth is going to reach "unprecedented levels". If you don't believe any of those, you should see US equities as a whole not as a default investment (as most investors do) but as an "an expensive and risky asset" to avoid.

We agree with Montier we've been suggesting you shift out of the US for some time, and we still think that's a wise idea. But while we are nervous about many other things too (Brexit failing, China being unable to cope with lower growth, trade wars, Italy's relationship with the European Union, and so on) we are loath to be too bearish on all markets. The rising importance of China and other emerging markets (now 40% of global GDP); high global debt levels; the productivity potential embedded in technology; the volatile oil price; and the uncertainty around the normalisation of monetary policy, all make today's world so non-binary, that making much in the way of precise forecasts is pointless.

With that in mind, turn to our cover story. There you will find all sorts of exciting ideas. Some are niche a small biotech and a helium miner. Some reflect the usual preoccupations of our writers (inflation and gold for example we do worry about stagflation). But others are interesting bets on the possibility that the misery consensus is wrong. What if Brexit isn't so bad? Perhaps you should buy UK small caps or shares in Next. What if the dollar weakens rather than strengthens? Perhaps you should buy emerging markets and India in particular. What if a full-blown trade war is averted? Then buy China. All these things are possible. A very Happy New Year to all our readers, and we'll see you again in 2019, on 11 January.

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021
Why you should expect another stockmarket crash
Stockmarkets

Why you should expect another stockmarket crash

Many fear inflation, but a deflationary debt collapse is a more likely scenario in the near term, says Tim Lee
16 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021