Over the past two years of QE-madness, central banks have fueled yet another era of epic complacency and reckless capital allocation based on the perverse thinking that when it comes to economic developments: good is good and bad is good– because bad news will mean continued monetary largesse. Hence a utopian world, where all economic outcomes make risk assets go higher.
But there is also a yin to this monetary yang which is naively or intentionally over-looked–we have now earned a time where good news will be bad and bad news will be bad for today’s over-valued asset markets. If growth miraculously does rebound as the Fed has repeatedly and erroneously forecast, then rates will go higher and stocks, over-valued bonds and already struggling debtors will necessarily weaken. And if growth doesn’t rebound and the economy stalls once more, a redux of more QE is likely to be seen as just desperate thrashing from central banks already long gutted of power by still zero-bound rates. See: The asset-rich, income poor economy for more. To wit:
“The Fed’s latest forecast has the economy growing above 3% during the balance of this year and next, and the unemployment rate falling to about 5.5% by the end of 2015. If the Fed’s sanguine scenario finally comes to pass, interest rates are likely to move meaningfully higher across the yield curve. The money pouring into the financial markets may be redirected, in part, to the real economy. Stocks, leveraged loans and real estate are likely to re-price in a higher interest-rate environment. If rates move quickly or unexpectedly, the vaunted balance-sheet recovery could suffer a blow.
What if there is an unexpected shock that causes the economy to slow in the next year or two? The Fed would surely be called upon to bolster asset prices and stimulate the real economy. But would a return to $85 billion per month of bond-buying really be effective? We are skeptical that either Wall Street or Main Street would be comforted by quantitative-easing redux.”