Sometimes it seems the only people who favor another round of Quantitative Easing are the Fed members and a few diehard Keynesian economists.
This week Bill Gross of PIMCO weighed in with a much-discussed monthly commentary. Gross’s take is that the economy is in a liquidity trap, meaning individuals and businesses aren’t going to borrow money no matter how low interest rates fall and how much money is available. They already have too much debt and have no confidence that the economy and markets will grow enough to make borrowing profitable. He thinks QE 2 will make things worse by raising inflation expectations and interest rates along wiht it.
Gross’s investment recommendations are similar to those we’ve made this year and last. Look for what he calls “safe credits,” such as high-grade corporate bonds and mortgages purchased at discounts. Also, invest in assets backed by strong currencies that will appreciate against the dollar.
John Hussman of the Hussman Fund also is against QE 2, and strongly so. Hussman thinks there will be short-term effects most investors view as positive: low interest rates, rising stock prices, and rising commodity prices. But these will be temporary and lead to problems. Here are key excerpts:
One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it. Over the years, I’ve repeatedly emphasized that inflation is primarily a reflection of fiscal policy – specifically, growth in the outstanding quantity of government liabilities, regardless of their form, in order to finance unproductive spending. Look at the experience of the 1970’s (which followed large expansions in transfer payments), as well as every historical hyperinflation, and you’ll find massive increases in government spending that were made without regard to productivity (Germany’s hyperinflation, for instance, was provoked by continuous wage payments to striking workers).
Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long (the current Shiller P/E of 22 for the S&P 500 has typically been followed by 5-10 year total returns below 5% annually). The Fed is not helping the economy – it is encouraging a bubble in risky assets, and an increasingly unstable one at that. The Fed has now placed itself in the position where small changes in its announced policy could have disastrous effects on a whole range of financial markets. This is not sound economic thinking but misguided tinkering with the stability of the economy.
I suspect any benefits of QE 2 already are reflected in the investment markets, and that as with QE 1 the effects on the economy won’t be enough to stimulate sustained economic growth.