June 21st, 2013 by Hafiz Noor Shams
This is truly a bonked up world. Sometimes it is as if humanity as a whole does not really know what it really wants. No, what it wants, what the market wants, is to have its cake and eat it too. Ever since quantitative easing became orthodox monetary policy, signals have been mixed up that it confuses the whole market.
Take QE for instance and its effects in Asia. Experts were worried that the expansive monetary policy in the US and more so in Japan these days were fueling asset inflation in across emerging Asia and elsewhere. There is also effectively a manipulation of exchange rates even if it is unintended and done indirectly (do not call it competitive devaluation!), which helps the export sectors of economies which are committed to QE. Those who see their currency appreciating by too much blame QE.
But now that the Federal Reserve Chairman Ben Bernanke said will end when the economy recovers, the equity markets of the whole world are tanking.
From 10,000 feet high, the ridiculousness comes in the form that good news is bad news and bad news is good news. The exact reason for the end of QE is a recovered economy. Judging by the equity and bond markets’ response to Bernanke, it seems that those markets are afraid that the market is recovering.
This highlights how QE has truly detached from the real economy.
As a digression, that does not mean that the QE is not working. It merely means that QE has caused these markets to be divorced from the so-called Main St. The real economy in these QE countries with its high unemployment rate and stuff clearly does not go in tandem with equity market. In the same line, I am the accusation that “Abenomics” has failed only because the Nikkei has jumped off the cliff as missing the point about the function of QE. The QE remains an expansive monetary policy aimed at improving output and not pushing the stock market up, however the function of the stock market as a leading indicator. The fact that the stock market and all of those investment papers are not part of the GDP calculation only stresses the actual intention of QE.
Looking closer, the detachment is understandable I suppose. It is a world of cheap money where the transmission of monetary policy is imperfect. Not all of those money get to the real economy, however it lowers long-term borrowing costs.
Anyway, in non-QE countries, oh, boy! It is almost like a boom. Domestic demand is strong, the stock market goes crazy (relatively because, when the KLCI is compared to regional bourses, all one can say is meh) and yields are so low that it makes sense for the government like Malaysia to expand its borrowing.
But now with the speculation of a tapering and Bernanke’s statement of the end of QE, the same those who complained about asset inflation are panicking, begging, Ben, please, don’t send the ‘copher back home. Stock market is down, yields on government bonds are up and the ringgit got spooked.
And yes, who can forget the craziness of the Treasuries are an insurance to its own downgrade? The magic of reserve currency!
Oh well. Just another day in this crazy world of ours.
At least gold is going down and I am extremely delighted of that. And that is not crazy.
Enough ranting. I have work to do.