I put some numbers on where asset prices could go from here.
So the RBA has gone QE.
This is probably one of the most important things to happen to markets in the past 20 years.
So let’s break it down.
So QE – Quantitative Easing. They are ‘easing’ the ‘quantity’ of money in the system. That is. They’re making more of it. Lot more of it.
How much more?
Well, the RBA’s committed to $100bn, at the cracking pace of $5bn a week.
Yes, let your head wrap itself around that for a minute.
The RBA is printing $5bn a week and pumping it straight into the economy.
But that’s not all. They’ve also committed to buying enough bonds to keep the price of bonds – which influences all interest rates – at a particular level.
The amount they’re willing to spend to do that is open ended.
So that $100bn figure is the base-line. It could easily be north of that.
And is it a lot in the scheme of things?
Yeah. By the end of it the RBA’s balance sheet will be something like 25% of GDP. The US Fed – who has been QE’ing its heart out since the GFC – currently has a balance sheet worth about 33% of GDP.
So we’re rapidly making up ground.
And what impact does it have?
Well, it has the exact impact you expect an abundance of cheap money to have. It pushes the prices of assets up – all assets.
And in a pretty major way.
Analysts at Societe General recently tried to estimate what the US stock market would have looked like if the FED hadn’t embarked on QE.
They reckon that without QE, the Nasdaq should be closer to 5,000 than 11,000, while the S&P 500 should be closer to 1,800 rather than 3,300”
So effectively QE caused those stock market indices to be worth about double what they would have otherwise been.
And there’s a bit of guess-work there, but we’re quibbling over degrees. Pretty much everyone agrees that this is what QE does.
And now QE is here.
Strap yourselves in.
It might sound ridiculous now, in the middle of a pandemic, to say that stock prices are going to double, or that property prices are going to double.
But remember that doubling won’t be on the back of any particularly amazing performance of our companies or our property markets.
It comes from the debasing of money. When money devalues, everything else becomes relatively more expensive.
And that’s what’s changing here – the relativity.
And there is literally no limit to how low a currency can go.
So to my mind, a doubling of the ASX200 or the median Australian house prices is totally on the table. It’s totally possible.
There are a few swing factors there. But make no mistake.
The QE monster has landed on Australian shores.
The game has changed.