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When the US Federal Reserve announced that it was not going to begin tapering-off QE – because the recovery was too fragile – stocks and metal prices rallied. So why is “bad” news such good news?
In a normal world, asset prices tend to be driven largely by considerations of supply and demand. So, if economies are growing, we would expect to see the prices of industrial commodities rising, because in a growing economy consumers will buy more cars, TVs, air-conditioners and so on, and thus will raise demand for the stuff they are built from.
Likewise, generally, stock markets strengthen during periods of economic growth, since the companies quoted on them will – in general – also benefit from the same sort of growing demand and therefore their value should increase.
So when the US Federal Reserve announced that it was not going to begin slowing down its rate of bond purchases under the QE programme, the consensus was that it had pursued that policy because it is not yet sufficiently convinced that the US economy is shaking off the woes of the past few years and resuming healthy growth.
Logically, we should have expected asset prices to have eased, since the Fed was effectively telling us the US economy was still too weak to be weaned off its reliance on what is basically a vast government subsidy.
But that’s not what happened.
Instead, the Dow hit a new record, industrial commodities rallied and bond coupons dipped – time to buy the risk assets again! The logic is understandable, but perverse.
The economy is, at best, recovering in a faltering fashion, so the government will need to continue to pump money into it; that money then has to go somewhere, which boosts the price of stocks, commodities, property, alternative assets and so on.
So, climb on the bandwagon, hitch it to the locomotive of governmental largesse and hope for the best.
I’m not totally convinced by the policy, but one has to concede that, so far, it has been successful in warding off further Lehman-like shocks to the world.
It may be that it succeeds in pushing problems so far down the road into the future that it does genuinely buy enough time to engineer a real recovery to create a solid base for global growth. It’s high risk, though, and the further we go down that road, the greater the potential disaster if the policy fails.
I’ve written about this before, and I’m not going to rehash the debate here, but there is one consequence that to me, having grown up in an era when investment analysts had the ability to move markets with their recommendations, is quite sad.
The function of the analyst seems to be becoming redundant, and serious understanding of an industry has no particular relevance any more in a world where the decision that traders and investors have to make on a daily basis is the binary one: will the government keep intervening at the current rate, or will it slow down?
For those who are interested, the “Alex” cartoon in the Daily Telegraph of September 23 sums up where analysts stand in today’s world rather neatly. Instead of analysing where a mining company, for example, sits on the cost curve, it’s more important to analyse Fed-speak, to try and second-guess when the turnaround will come.
I can’t help but feel, though, that the smart investor is the one who doesn’t ignore the underlying reality, while still being prepared to play the short-term game.
It’s not the place of this column to name names, but most readers will be aware of one commodity – or even more specifically, metal – based fund that is still deeply involved in the nitty-gritty of the metal and mining industries as well as the more fashionable government-money-following business; its returns seem to be holding up well, which may not be the case for a number of those purely playing the “risk-on/risk-off” game.
As I said above, the QE policy has bought time, but I think I’d rather keep a foot in the fundamentals camp, as well; one day the pendulum will swing back again.
Lord Copper editorial@metalbulletin.com