What The Hell Is Going On With Asset Prices?
By Roger Nusbaum, AdvisorShares ETF Strategist
Tiho Brkan (@tihobrkan) tweeted out the following chart noting that yields on European junk bonds are now less than the yields on European equities. Tiho believes this has never happened before.
In a related note, my brother and I were having a conversation over the weekend about how much equities have gone up and the extent to which that has helped anyone participating in markets. He asked if I thought the tax cut was a driver, it was telegraphed as an objective and then of course it was passed. The markets though have been moving higher for nine years.
As low volatility and ever higher equity prices persist along with anomalies like the one that Tiho found, it leads me to think that all of the various flavors of QE around the world have grossly distorted markets as a flood of money has not been allocated efficiently, it has all gone into asset markets pushing equities up and contributing to how low yields are. You’ve no doubt seen data about there being trillions in negative debt outstanding, globally, as one example of a gross distortion.
Companies seem more intent on stock buybacks (a source of upward pressure on prices) than on research and development and other forms of capex. Central banks of course have been buying assets including Japan and Switzerland buying equities (a source of upward pressure on prices). Many countries have been trying to weaken their currencies, like Japan and Switzerland. Wealthy people have benefited from all this, having more to put into markets (a source of upward pressure on prices). Another form of distortion is that as of last Friday the US Ten Year Treasury Note yields 68 basis points more than Italian Ten Year sovereign debt.
The idea that the crisis and then QE have grossly distorted asset prices and inter-market dynamics is of course not new. There have been countless articles that have attempted to quantify how much or how little of the last nine years of gains should be attributed to QE. Right or wrong, I don’t think QE’s influence can be quantified in any precise manner, but sentiment seemed to move away from the idea that it was as big of a factor as was originally feared ten years ago. GDP has been positive and there have been a lot of jobs created which people take as being organic and healthy. My pushback would be that GDP has been weak versus past recoveries/expansions and we have a serious problem with underemployment as more and more jobs require STEM backgrounds and collectively, we lack that training. Another huge growth area for jobs-needed is low paying health care jobs. Great that people are able to find work at all, but a problem is created when too many of us don’t have the discretionary spending power needed to lift the economy in a truly organic fashion.
A couple of years ago, I was probably more in line with the consensus of QE having helped but with diminishing impact as time went on. Now, so much time has gone on with the markets still elevating that I am now back to thinking QE has been overly influential. Based on what we were all taught in economics this should have a very bad outcome. I have no idea whether that will be the case and I have had clients in the market, so they have participated but we should be more concerned with QE leading catastrophe because that obviously has more of an impact on our futures than some sort of relatively benign bear market that sends the indexes down 25-30% for only a year or so.
Investors tend to get complacent and whenever things do start to turn (no attempt here to predict when that happens) there will be a parade of talking heads on stock market television telling us not to worry which can make the complacency worse. I would tell you to Ride the market up as long as it keeps going, stick to your investment strategy whatever that might be and know that the next one won’t be different.
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