QE is driving up stock markets because the money has nowhere else to go says Prudential bossPosted on 03 February 2013 with 4 comments from readers
Quantitative Easing has come under strong attack from the head of one of the UK’s largest investors, Tidjane Thiam of the Prudential insurance company in an interview in The Daily Telegraph this weekend. He said this monetary policy causes ‘amazing distortion’ and is now ‘just storing up trouble by minimising short term pain.’
‘What we are seeing in the equities market is the translation of the QE distortion because the money [created] has nowhere to go,’ he added. ‘I am very worried we are creating bubbles, everywhere. Interest rates will have to normalise. And it is not clear to me what the exit strategy is. I ask central bankers this all the time and I still have not heard a single sensible answer.’
$600bn QE program
The Bank of England has become the largest supplier of QE in the world on a per capita basis with almost $600 billion pumped into the economy.
Mr. Thiam added: ‘In the macro economy: savings equal investments. But QE is depressing savings and therefore depressing investment. This means, QE is depressing growth. It is a really strange economic strategy because everyone is looking for growth – but the monetary policy is completely anti-growth. There is no other exit to indebtedness than growth.’
That leaves economies like the US, UK and soon Japan locked in negative feedback loops. ‘QE creates a total distortion in the economy,’ concludes Mr. Thiam. ‘The risk free rate is possibly the single most important piece of economic information we have and we shouldn’t mess with it. That is a dangerous game, because, to manipulate the risk free rate is to introduce huge distortions.’
ArabianMoney readers will know where we think this will end up: with high inflation, a bond and equity crash, higher interest rates and a shift into precious metals as the currency of last resort. It is curious to read how really serious investors like the Prudential are coming around to what was previously regarded as lunatic fringe thinking.
Still it is impossible to know how long this madness will go on. We remember getting the Nasdaq bubble nonsense right six months early and waiting painfully for the crash (actually this writer decided to go off around the world for three months and came back with a business plan to make a dot-com fortune in the Middle East).
Nothing goes up forever as Emaar Properties’ investors learnt today when their shares crashed 3.7 per cent, that said after a 37 per cent run up in price in January this is hardly a shock. There will be a day of reckoning for many bubbles but when?