Allocating capital post-QE

[GoSeigen]

Matt,

In the UK QE ended long ago. Same FAIAP in the US. Whether that means the end of free money as defined by the OP is for him to say -- so far he has been reticent!

GS

Hi GS,

Personally I see the term "Free Money" as being just another way of saying "Cheap Debt". IOW the long-lived era of hyper low interest rates we've seen *possibly* engendered by QE.

But I'm still just as curious as to see how (if at all) the current state of affairs will wind down as it were.

Matt

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.


It might make sense to say that rates are this low because the BoE prematurely ended QE.


GS

[dealtn]

I'm not interested in extrapolating further, just whether the general state of affairs will remain (real interest rates below zero, low inflation), or change.

Well you postulated interest rates would remain "for a long time", and referred to a study covering over 500 years. It wasn't too much of an interpretation to think you were referring to quite a lengthy period from now into the future. I would suggest on a meaningful timeframe "now", indeed the last decade, is exceptional, and the "general state of affairs" won't remain. On a, say, 5 year view however, I doubt much will change.

[bofh]

What did mean by when big money stops "buying the dip". Sorry if I appear ignorant. Since I'm a relative newcomer my only experience of "buying the dip" is that it's something I currently do a lot of - if I can. E.g. November-December 2018 we piled into UK equities in the small dip back back then, and very recently we bought "JP Morgan Chinese Investment Trust" when the first big corona dip happened.

Yes, "buying the dip" is buying on price weakness...e.g. buying when price retraces to a major support level, or on a bullish reversal at a major support level (trading less risk for worse prices). And I qualified it with "big money" as its institutional trades that move major markets. So bullish investors with cash to invest tend to keep buying the dip until it stops working (i.e. becomes unprofitable!). One way to think of a "price retrace" is orderly profit taking; participants that bought at lower levels reducing their open risk (e.g. through "top slicing" investments or closing short term trades). But when profit taking gets "overdone", fear increases and more participants exit which can lead to a more material price correction (5-10%), after which price can keep making higher highs and higher lows as the bull market continues on.

But if we fast forward to the "point of recognition" - whatever that might be - the sign for you that the economic weather is materially changing

So what do you think that will look like to an occasional Radio Four listener/online news reader? (I know you've not got a crystal ball!!). But is it likely to be things like interest rates (and inflation) rising....since they stop using QE to suppress gilt yields etc.

I look at the price action on the weekly (and monthly) price charts of the major indexes relevant to my holdings - for me that's the SP500 and FTSE100. I keep it simple: "is the market trending up, trending down or going sideways?". Since I don't believe I can "sell the top" or "buy the bottom" (except by accident!), it can take time and patience to observe the lower highs and lower lows on a weekly chart. In the interim, I would be either sitting on my hands not buying anything or reducing size so that I lose less if I'm wrong or choose to take more pain for longer . When the "point of recognition" comes, I won't be selling out of equities, beyond a few shares I'd sell outright since they are not very defensive. I would take out some index shorts, but these will not be "big bets", swing trades with between 1-3% risk. So in other words, I'd be "trading" rather than "hedging". To be clear, my trading is short term and a small pot, quite separate from my longer term investments.

Thanks for the good questions Matt.

[TheMotorcycleBoy]

Politely, to those (SH and GS I believe) who have said in this thread that QE has ended, I beg to differ. Did not the US and Germany governments recently restart bond purchasing schemes?

https://www.cnn.com/2019/10/11/investin ... index.html

https://www.bloomberg.com/news/articles ... man-judges

I'm given to understand that the central banks purchasing bonds from the markets is how QE is implemented, and given that capital markets are effectively global presumably that liquidity locally created will have world wide impacts.

But besides, even without these recent extra splurges I believe the type of "Free Money"/"Cheap Debt"/"world is awash with capital" to which several on here have referred, has a certain amount of hysteresis, so presumably it's effect (depressed interest rates? elevated risk asset prices?) does not end the moment the tap is closed.

Matt

[dspp]

has a certain amount of hysteresis, so presumably it's effect (depressed interest rates? elevated risk asset prices?) does not end the moment the tap is closed.

Matt

Do you mean momentum ? Hysteresis is the property of going back along a different pathway. I'm not saying hysteresis is not relevant, but I think you are postulating momentum, which is likely also relevant.

regards, dspp

[TheMotorcycleBoy]

has a certain amount of hysteresis, so presumably it's effect (depressed interest rates? elevated risk asset prices?) does not end the moment the tap is closed.

Matt

Do you mean momentum ? Hysteresis is the property of going back along a different pathway. I'm not saying hysteresis is not relevant, but I think you are postulating momentum, which is likely also relevant.

regards, dspp

No I mean hysteresis. Which in my book is v. similar to wiki's opinion.

https://en.wikipedia.org/wiki/Hysteresis

Hysteresis is the dependence of the state of a system on its history....

IOW we can (as money market manipulators) take a bunch of actions and there will be a lag in their effects. Hence we shouldn't expect low IRs (or whatever the agreed effect of QE is) to stop the moment that QE ceases.

Momentum is different - it's a phenomenon's tendency to perpetuate unless resisted by an external force. For a stock price presumably the reality is that the market has come to it's senses..., profit taking has started etc.

Matt

[TheMotorcycleBoy]

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.

GS, I would help me immensely (w.r.t. this debate) if you define what you mean by monetary rates. In particular are they the same or different as interest rates, currency rates and so on.

*puzzled emoji*

Matt

[dspp]

has a certain amount of hysteresis, so presumably it's effect (depressed interest rates? elevated risk asset prices?) does not end the moment the tap is closed.

Matt

Do you mean momentum ? Hysteresis is the property of going back along a different pathway. I'm not saying hysteresis is not relevant, but I think you are postulating momentum, which is likely also relevant.

regards, dspp

No I mean hysteresis. Which in my book is v. similar to wiki's opinion.

https://en.wikipedia.org/wiki/Hysteresis

Hysteresis is the dependence of the state of a system on its history....

IOW we can (as money market manipulators) take a bunch of actions and there will be a lag in their effects. Hence we shouldn't expect low IRs (or whatever the agreed effect of QE is) to stop the moment that QE ceases.

Momentum is different - it's a phenomenon's tendency to perpetuate unless resisted by an external force. For a stock price presumably the reality is that the market has come to it's senses..., profit taking has started etc.

Matt

Matt,

I know what the difference between hysteresis & momentum is. If you are referring to something that has consequences that "does not end the moment the tap is closed" then that is the property called momentum.

regards,
dspp

[SalvorHardin]

Politely, to those (SH and GS I believe) who have said in this thread that QE has ended, I beg to differ. Did not the US and Germany governments recently restart bond purchasing schemes?

I'm given to understand that the central banks purchasing bonds from the markets is how QE is implemented, and given that capital markets are effectively global presumably that liquidity locally created will have world wide impacts.

The US has been talking about it, they haven't formally started. The problem in defining QE is that central banks in normal times will routinely buy (and sell) large quantities of bonds to stabilise the market, manipulate the market and to control the timing of debt repayments. I haven't seen anything which says that America is currently undergoing any more QE; perhaps QE should really by defined by how much larger it is when compared to normal treasury management?

From October 2019: "The Federal Reserve began buying short-term Treasury debt Tuesday at an initial pace of $60 billion a month, but officials say these purchases are nothing like the bond-buying stimulus campaigns unleashed by the central bank between 2008 and 2014 to support the economy. "

https://www.wsj.com/articles/the-fed-is ... 1571218200

I found this article from January which talks about the USA, Britain, Japan and the EU "rebooting their quantitative easing (QE) programmes" sometime in 2020.

https://www.telegraph.co.uk/business/20 ... -rebooted/

One of the ways in which central banks move markets is by hinting that they may be doing something. This is why the Chairman of the US Federal Reserve is generally extremely careful in what they say because their words do move markets. From 2019, "It only took one word from Fed Chair Jerome Powell on inflation to send the markets reeling, and that word was "transitory.""

https://www.cnbc.com/2019/05/01/heres-t ... brows.html

GoSeigen will be much better informed on this than me - about the only thing that I pay much attention to in fixed interest markets is the 10-year gilt and US Treasury yields (for comparison with equity dividend yields and earnings yields).

[GoSeigen]

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.

GS, I would help me immensely (w.r.t. this debate) if you define what you mean by monetary rates. In particular are they the same or different as interest rates, currency rates and so on.

*puzzled emoji*

Matt

Monetary rates = interest rates on money. Usually means those set by the markets (e.g. rates on demand accounts) and those set by central banks (UK base rates).

GS

[GoSeigen]

Politely, to those (SH and GS I believe) who have said in this thread that QE has ended, I beg to differ. Did not the US and Germany governments recently restart bond purchasing schemes?

I'm given to understand that the central banks purchasing bonds from the markets is how QE is implemented, and given that capital markets are effectively global presumably that liquidity locally created will have world wide impacts.

The US has been talking about it, they haven't formally started. The problem in defining QE is that central banks in normal times will routinely buy (and sell) large quantities of bonds to stabilise the market, manipulate the market and to control the timing of debt repayments. I haven't seen anything which says that America is currently undergoing any more QE; perhaps QE should really by defined by how much larger it is when compared to normal treasury management?

[...]

GoSeigen will be much better informed on this than me - about the only thing that I pay much attention to in fixed interest markets is the 10-year gilt and US Treasury yields (for comparison with equity dividend yields and earnings yields).

Personally think SalvorHardin will be as well-informed as I if not better; here ends the mutual backslapping!

The essence of QE is that it increases the monetary liabilities of the central bank on its balance sheet [purchasing bonds is the method of achieving this]. So if the CB's balance sheet composition is hardly changing over an extended period it's hard to argue that it is engaging in QE! The buying and selling that SH refers to has been the way CB operate for decades: the buying and selling were contrived so as to keep the CB's monetary liabilities constant while affecting the interest rate only. QE radically changed that with CBs issuing new base money.

In the US and UK QE ended some time ago. The ending of QE can be interpreted as a tightening of monetary policy. Subsequently interest rates were raised in the US and UK, a further tightening of policy.

My view is that the central banks were largely impotent after the GFC and QE had negligible effect, the primary driver of money rates has been the commercial banks and their customers.


Unfortunately the OP was not specific about which markets or countries he was referring to. As this is a UK-focussed board I assume he was primarily concerned with the UK's markets, and I don't think Germany (?? MCB do you mean Japan or EU??) is particularly relevant...



GS

[odysseus2000]

Morgan Stanley analyst raises bull case to $1200 per share:

https://twitter.com/Speculators03/statu ... 68805?s=20

Regards,

[TheMotorcycleBoy]

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.

GS, I would help me immensely (w.r.t. this debate) if you define what you mean by monetary rates. In particular are they the same or different as interest rates, currency rates and so on.

*puzzled emoji*

Matt

Monetary rates = interest rates on money. Usually means those set by the markets (e.g. rates on demand accounts) and those set by central banks (UK base rates).

GS

I'm still puzzled.

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.

I'm wondering whether you've even taken a deliberately contrarian view!

From the BoE's website https://www.bankofengland.co.uk/monetar ... ive-easing I quote:

How does quantitative easing work?
Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds (the investopedia website explains more about bond yields). This pushes down on the interest rates offered on loans (eg mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.So QE works by making it cheaper for households and businesses to borrow money – encouraging spending.

Furthermore UK interest rate data from https://www.propertyinvestmentproject.c ... ory-graph/ reveals a fall of IRs roughly coincident with the QE introduction.

Unfortunately the OP was not specific about which markets or countries he was referring to. As this is a UK-focussed board I assume he was primarily concerned with the UK's markets, and I don't think Germany (?? MCB do you mean Japan or EU??)

Sorry yes the EU. I remember it from this summer https://uk.reuters.com/article/uk-ecb-p ... KKCN1TJ0PK I even posted about it here too: viewtopic.php?f=76&t=18157

but it looks like it (more QE) is something being discussed rather than being implemented.

is particularly relevant...

re. the locality of the QE I made this point in my earlier post:

and given that capital markets are effectively global presumably that liquidity locally created will have world wide impacts.

I mean, Brits on TLF buy US stocks too - right?

Matt

[GoSeigen]

GS, I would help me immensely (w.r.t. this debate) if you define what you mean by monetary rates. In particular are they the same or different as interest rates, currency rates and so on.

*puzzled emoji*

Matt

Monetary rates = interest rates on money. Usually means those set by the markets (e.g. rates on demand accounts) and those set by central banks (UK base rates).

GS

I'm still puzzled.

QE has absolutely nothing to do with the low rates. The purpose of QE was to raise monetary rates, not to lower them.

I'm wondering whether you've even taken a deliberately contrarian view!

Aaaargh! Senior moment. I see why you are confused. I meant the purpose of QE was to raise inflation, not raise rates.

No idea at all why I mixed that up apart from trying to rush out a post between other tasks. I'll go back to sleep now and leave everyone to discuss the topic sensibly!


GS
P.S. I'm pretty sure I'm not confused about the primary point which was whether QE had ended or not.......

[bofh]

GS wrote:

P.S. I'm pretty sure I'm not confused about the primary point which was whether QE had ended or not.......

Speaking as the OP, that wasn't my primary point, but from your responses I can see how it became that for you.

I know you wrote that you'd go back to sleep now, but if you wish to share your thoughts on asset allocation in the context of over-inflated asset prices, I'm certainly all ears.

[TheMotorcycleBoy]

Aaaargh! Senior moment. I see why you are confused. I meant the purpose of QE was to raise inflation, not raise rates.

No idea at all why I mixed that up apart from trying to rush out a post between other tasks. I'll go back to sleep now and leave everyone to discuss the topic sensibly!

You are forgiven old boy

[TheMotorcycleBoy]

GS wrote:

P.S. I'm pretty sure I'm not confused about the primary point which was whether QE had ended or not.......

Speaking as the OP, that wasn't my primary point, but from your responses I can see how it became that for you.

I know you wrote that you'd go back to sleep now, but if you wish to share your thoughts on asset allocation in the context of over-inflated asset prices, I'm certainly all ears.

Again I'm a March 2018 greenhorn so my views are probably a tad naive, but presumably swamped by liquidity, the assets (regardless of their classes) are like boats, so have by and large all risen alike.

To me, that means "carry on as you are" I guess.

Matt

[Bubblesofearth]

Hi,

What are your asset allocation plans when the "free money" eventually runs out, interest rates climb and trigger large scale loan defaults?

Thanks

I think you've pointed out a major reason why interest rates will not climb significantly for some time. There is still a mountain of debt out there which will continue to limit further lending which, in turn, is a key driver of inflation.

So high existing debt limits further issuance of debt which limits increases in money supply which limits inflation which limits the need for interest rate rises.

There has been some talk of a change in economic policy whereby governments spend money on public projects essentially sidelining any resulting public debt increases. There is of course opposition to this but IMO it would maybe get the nod if there was a real threat of debt deflation.

Like many on here my asset allocation has always been skewed towards stocks and property. Very little in cash or bonds. I see no reason to change.

BoE

[GoSeigen]

GS wrote:

P.S. I'm pretty sure I'm not confused about the primary point which was whether QE had ended or not.......

Speaking as the OP, that wasn't my primary point, but from your responses I can see how it became that for you.

Yes, that's what I meant.

I know you wrote that you'd go back to sleep now, but if you wish to share your thoughts on asset allocation in the context of over-inflated asset prices, I'm certainly all ears.

If asset prices are over-inflated then have a large cash and government bond allocation. It's that simple. For those who like risk there are derivatives and short positions. However I think several people on this thread (including me here: viewtopic.php?t=21819#p284899) have questioned the premises of the OP.

GS

[dealtn]

If asset prices are over-inflated then have a large cash and government bond allocation. It's that simple.

Er, Government Bonds are one of the most over-inflated assets though!