Why QE is Not a Performance Enhancing Drug

You know the drill. Markets go down. Cries for stimulus go up.

The programed response is: more drugs are needed to improve performance.

Lance Armstrong was publicly shamed for this approach. Janet Yellen is publicly praised. Go figure.

They say a picture paints a thousand words. This is a picture of the flow-on effects of QE being injected into the veins of the economy.

Source: RBS Macro Research

Who would have thought that printing money and giving it away for free would lead to wealth re-distribution, resource misallocation and asset bubbles?

Have you noticed where the loudest cries for more stimulus are coming from? It’s not from Mr and Mrs Average. It’s from those who’ve benefited most from wealth re-distribution, resource misallocation and asset bubbles. The Wall Street chorus.

Without Governments making the hard decisions — adjusting spending levels and tax reform — it’s down to the QE to create the illusion. The illusion that the economy is cycling along from strength to strength.

There is not a Government in the world today that has the spine to implement the hard decisions. Why would they when they can go to the medicine cabinet for another bottle of QE?

The next chart shows what happens to economic growth (blue line) when the debt steroid (red line) builds up in the system.

Source: STA Wealth Management

Low debt equals high performance.

High debt equals low performance.

The greater the monetary stimulus, the more sluggish the economy becomes. Which in turn increases the calls for more stimulus.

While US economic growth has been trending downwards since 2000, the US share market has enjoyed two very bullish periods — 2003 to 2007 and 2009 to now.

These periods were a direct result of the Fed openly handing out the needles and ‘roids.

Low interest rates created the US housing bubble that burst so spectacularly in 2007/08 with the subprime lending implosion.

In 2009 the Fed dispensary upped the uppers — even lower interest rates for longer, and US$4 trillion in fresh dollar bills. Worked a treat.

The Dow climbed effortlessly to higher and higher levels.

The underlying economic performance does not justify the market being at these levels.

Wall Street knows this, hence the calls for more stimulus if the market starts to get a case of the serious wobbles.

Much is made of improving US unemployment numbers showing the economy is recovering. Unemployment data has to be the most tortured statistic produced by government. It’s beaten to within an inch of its life to say whatever government wants it to say.

  • Move onto a disability pension. You are no longer unemployed.
  • Paid for at least one hour’s work last week. You are no longer unemployed.
  • Despondent and given up looking for work. You are no longer unemployed.
  • Qualified engineer could only find work as a waiter. You are no longer unemployed.

What’s reported in the news is the U.3 rate — which is basically a reflection of those still left who are hopeful of obtaining a job. The latest reading is 5.1% unemployed.

Another, lesser known, government unemployment rate is the U.6 — the very long winded ‘Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons’ measurement.

The official number under U.6 is 10.3% — double the U.3 rate.

The airbrushing of long-term discouraged workers from the official unemployment data happened way back in 1994 — under Clinton’s administration.

According to the alternate unemployment charts prepared by ShadowStats (based on the pub test of who is really under and unemployed) the more realistic US unemployment rate as at August 2015 is 22.9%.

That is Great Depression level unemployment data.

Little wonder the bureaucrats prefer to trumpet the U.3 measurement that shows Yellen and Obama are doing their job (well paid and full-time ones at that).

You can fool some of the people, but not all the people.

People giving up on looking for work. Or doing jobs that are well beneath their skill set (one they incurred a hefty student loan to obtain). Or working a few hours per week. Or in receipt of disability and food stamp welfare payments. These people do not make for a rebounding economy.

The absence of a sufficient number of credit addicted US consumers is reflected in the sluggishness that is showing up all over the world.

China is slowing faster than most realise…which is why they have announced more stimulus measures.

Europe is barely in positive growth territory — heavens knows how they’ll finance the hundreds of billions of euros needed for the re-settlement (housing, food, social security, health care) of millions of refugees. I see more QE in Europe’s future.

Japan’s grand plan to double its monetary base has produced negative growth in the second quarter. If this keeps up Japan may opt to treble or quadruple their already doubled money base. Who knows what Japan could dream up? They’re off in a fairyland all of their own.

Australia’s public debt (Federal, State and local) levels have a one-way ticket to a higher destination. Name me one State or major Local government that is forecasting a budget surplus?

The stimulus steroid continues to course through the global economy’s veins in greater quantity, but the markets are no longer cycling to higher ground as easily as before.

Knowing that continued abuse of QE is likely to endanger the economy’s vital organs (which have already been damaged beyond repair), what’s Dr. Yellen’s likely response to a major market downturn?

More QE.

A medical doctor would be struck off for this level of malpractice and incompetence, but Yellen will probably get on the cover of Time magazine as a financial genius.

In due course the real economy trumps an artificial market.

The market action we’ve seen in recent weeks is recognition the economy does not have the strength to justify the market’s performance.

The market’s six-year Tour de Farce may soon be reaching the finish line.


Vern Gowdie

Editor, Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money