In a DB note over the weekend titled the “Illusory Benefits of Cheap Money” the author Oleg Melentyeb turns his attention to relative performance in broad equity benchmarks. Surely, Oleg writes, “easy monetary policy now coupled with direct involvement by central banks in pushing down the price of credit risk, equity performance distribution must be in direct proportion to those efforts.” He finds something unexpected: “Wrong, the answer is exactly the opposite.“
To prove that he shows the charts below which depict relative performance of US, EU, and Japan broad equity benchmarks against the MSCI World index (MXWO) since Jan 2008. The timeframe here was chosen to fully capture the period of extraordinary central bank activity around the globe.
Interesting picture emerges from a closer look at these graphs. US equities are the best performing segment among these three, having outrun the global index by 41%. Remarkably, however, more than half of that outperformance was achieved after the Fed was done with QE; the relative standing was +18% in late 2013. Also remarkably, the last 10% were achieved since mid-2015 as the Fed prepared for and executed the first rate hike in this cycle.
The picture is quite different in EU and Japan, where initial easing/QE announcements in 2015 and 2013 respectively have delivered the expected sugar-rush of risk appetite, most of which has been reversed by now, just as those policies went from a drawing board to implementation.
The charts below show the surprising relative change in US vs European vs Japanese stock markets since the end of QE3 in the US and the launch of aggressive monetary policies elsewhere around the world.
DB’s conclusion:
if the central banks behind extreme policy measures have little to show for the risk they have taken on their balance sheet to this point, and the pressures they have subjected their savers and financial institutions to, why should we expect such actions to be extended much further into the future? Any benefit of additional central bank accommodation appears to have been largely exhausted at this point in the cycle.
If that is indeed the case, it is much more likely that a year from now we would see those programs on their way to curtailment rather than further expansion. Fundamentals would once again prevail over technicals, just as they always do over time. Recent market moves suggest investors are beginning to position themselves accordingly in anticipation of such an outcome.
The problem with that is that should global markets, even those lagging the US such as Europe and Japan, trade on “fundamentals”, then there is a lot of pain in store. Which may explain the ever increasing willingness of central banks to discuss and even contemplate helicopter money as the last recourse fusion of fiscal and monetary policy, one meant to provide a final inflationary stimulus, which will either push yields higher around the globe – a necessary and sufficient condition to inflate away the massive debt load – or will fail, leaving only mass defaults as the last resort to eliminate trillions in global excess debt. And since that would mean wiping out the bulk of the status quo’s equity “net worth”, one can be certain that absolutely everything will be tried before this last-case option is attempted.
via http://ift.tt/28JfczN Tyler Durden