So I got an odd email the other day.
“Dearest trusted frond, I am writing to you because I need your urgent respond relating this mutually beneficial business. I must to deposit $1 trillion in your account…”
Yeah yeah yeah. I’ve heard it all before. Someone out there is just giving money away for nothing.
But then I read to the end. And what do you know, it was signed:
US Federal Reserve
So I looked into it and guess what?
It turns out that this one is legit. I’ve never met this guy Ben, but right now, he is doing everything he can to make me a very rich man.
Remind me to buy him a beer one day.
And he’s not the only one. He’s got friends at the Bank of England, the Bank of Japan, and even Super Mario Draghi at the European Central Bank has put his name on the card.
I know it sounds crazy, but they are all doing everything in their power to send a wall of money barrelling my way.
In fact, you’re going to actually have to work pretty hard to avoid it!
“Quantitative Easing” is the new fad in central banking and it’s all the rage. From New York to London, from Paris to Tokyo, everybody’s doing it.
Another way it’s been coined is “kicking the can down the road.”
Interest rates are so 1990s.
In pretty much every economy that matters, interest rates have hit the floor and have nowhere else to go. In the US and the UK it was the GFC that finally broke the camels back, but Japan has had an official cash rate of zero percent since the late nineties.
And in Japan, the “zero interest rate policy” was a bust. Growth averaged less than 1 percent a year in the 2000s, and inflation was negative. Japan now has not one, but two lost decades.
But when the GFC hit the states, Buffalo Ben Bernanke at the Federal Reserve wasn’t about to lose a decade on his watch, no sir!
Knowing that letting the price of money sit at zero percent wasn’t going to help America any more than it helped Japan, The Fed had to get creative.
So with the price of money locked in at zero percent, the Fed started targeting the quantity of money. And so we entered the Quantitative Easing era.
But what does Quantitative Easing mean in practice? Printing money. Pure and simple.
There’s no printing press cranking up beneath the Fed building in New York, but in the digital era, there doesn’t need to be. Just a few clicks of the mouse and the Fed trillions and trillions of new dollars start gushing into the economy.
As public policy, it’s the kind of idea that would have got you kicked out of economics school in the eighties, but desperate times call for desperate measures. And the Fed had run out of options.
And no one is sure that Quantitative Easing is actually going to work. So far, it hasn’t had much success in getting the American economy going.
But that hasn’t stopped every major central bank from jumping on the Quantitative Easing bandwagon – the UK, Europe and Japan.
They all find themselves in the same boat…
… without a paddle.
What’s the theory behind QE? Basically it’s about targeting liquidity. Back in the old interest rate era, if you wanted to give the economy a nudge, you knocked 25 basis points off the cash rate. Banks then passed this on to their customers, making it cheaper for consumers to consume, and business to invest.
Economic activity was given a boost.
But how do you make it cheaper for consumers and businesses if your cash rate is already zero? The idea behind QE is that if you just get so much money slushing around the economy, banks will start falling over themselves to lend it out to paying customers. Competition between the banks will drive rates even lower.
Side Note: I am going to write about this phenomena later in the week… move over Glen and the RBA, the “big bad banks” are cutting rates…with no RBA assistance… Go figure.
Anyway more later…back to my thinking and analysis.
Let me fill you in on the big secret.
What is going right now should be called,
….the wealth effect.
And 99% of investors are either missing out on this “wealth effect” or will wake up and it will be to late.
The Central Banks know that if you send truckloads of cash into a market economy, first and foremost it will get directed to where returns are greatest.
The money will eventually find it’s way to Mr and Mrs Jones to help them buy a plasma screen TV, but not before it finds its way into high yielding assets first, things like stocks and particularly real estate.
The banks know that all this cheap money is going to have a MASSIVE effect on asset prices.
And what are they going to do about it?
If asset prices rise, fine, let them rise. In fact, the central banks are actually banking on it creating what is called a wealth effect. That is, as people’s assets rise in value, they feel wealthier, and they’re more inclined to spend and consume.
Brian Sack, the markets chief of the New York Federal Reserve, the man with his hand on the actual printing press (sorry, mouse), let the cat out of the bag:
“[QE]… can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”
Yep, you heard right. The Fed’s implicit strategy is to pump up asset prices, and make people who own assets, wealthier. And then pray that this wealth effect gets consumer spending going again.
And so in a world where all the central banks that matter are trying to pump up asset prices, what’s the most logical thing to do?
Own assets, of course.
I don’t know if QE is actually going to get the world economies going again, but it is definitely going to ramp up asset prices. All that money has to find its way somewhere.
This is the beginning of a long bull run. Investment giants Bain & Co. reckon that this
“superabundance of capital” is going to keep the world “awash with money” until 2020, when financial assets will be worth 10 times the size of the entire world economy!
After that? Who knows? The world might muddle through or it might come undone.
But the take home lesson is that right now, there are unprecedented global forces – trillions upon trillions of dollars, and the biggest central banks in the world – all doing every thing they can to make you wealthier.
It’s going to be a wild ride, but if you play your cards right, there’s going to be a lot of money to be made.
Stay smart, stay invested or get going. You’ll seriously kick yourself if you miss out on the next 12months.
My preferred asset class is of course real estate…the time is perfect.
And of course, remember to send Ben some flowers.