Investors Get Fresh QE From Europe

European Central Bank policy makers agreed to an unlimited bond purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.  ECB President MarioDraghi said the program “will enable us to address severe distortions in government bond markets... Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”

Is the US Fed next in line at next week’s meeting?  Some models put the odds at about 30%.  It is unusual for the Fed to take major actions just prior to a presidential election as they don’t want to be blamed by either party for their decisions.  If the markets and economy can stay on life support from the ECB program through November, the Fed will likely delay any significant decisions until then, but may talk up the idea of the possibility of further easing to appease the QEopiate addicted markets and help avoid further rioting.

Models continue to suggest that further ECB and/or Fed QE is unlikely to be a sustained positive influence on economic growth, while long-term costs of such policies are likely to grow. Credit allocation by the Fed kept zombies alive and chose economic winners while letting others fail in a move away from markets and toward institutionalized Cronyism. Fed MBS purchases did not lower rates for those most in need of new credit, while subsidizing some industries, sectors, individuals, and firms, at the expense of others, chosen by the Fed and not by consumers and markets. Further subsidies for a housing industry already suffering from over-expansion simply delay needed adjustments and direct credit to industries where markets would be pulling back for good reason. Driving interest rates artificially low toward zero has destroyed some industries, and undermined savings incentives at exactly the time when savings increases are most needed both to work down excessive debt levels and to encourage a pool for investment into productive capital assets needed to improve growth, productivity, solvency, and competitiveness. QE prevents governments from attacking over-indebtedness and overspending, and its effects are ephemeral. When combined with temporary spending bills, the effect is to buy time that is totally wasted while public debt levels soar without building corresponding increases in income to justify them. More QE will indeed likely act as a sugar-rush to financial markets - but “substantial and sustainable” economic growth will not be enhanced because no fundamental determinant of long-run growth will be changed for the positive by QE.

Beware of over-indebted countries instituting the four D’s that often accompany the declines of civilizations throughout recorded history - Default (on obligations and promises), Deceive (change inflation and unemployment definitions, etc.), Devalue (the currency and assets), and Dominate (increase controls over everything, including markets and market processes).

The optimum policy in this crisis is the “Harding solution” of huge cuts in the role of government, in the percentage of government/GDP, and in government spending, accompanied by persistent and substantial phased-in long-term tax cuts that encourage capital investment to boost productivity. This is one of the few mixes of policy that restore freedom and growth potential to the private sector, take advantage of higher multipliers for the private sector vs public sector (Barro), and do what Martin Wolf has suggested is essential - “policy must both sustain demand and facilitate de-leveraging.” So far few are even entertaining any such policy.

Our Advice

Markets have been rallying in anticipation of QE from Europe and possibly US and China.  The rally could continue but with increasing tail risk of a large potential correction at some point. Therefore caution is advised in buy/hold portfolios. Lowry’s Operating Companies Only A/D line is now diverging from stocks and lagging, a key signal that has preceded nearly every major top in the averages since 1920, and a signal that has not occurred in stocks since the 2009 bottom. Over 50% of the world’s GDP faceselections this year too, which could change the outlook or at least make itmore volatile ahead. Risks to the downside remain. 
 
Alternative investments, both strategies and asset classes, are likely to prove a better defensive posture for investors for the foreseeable future, offering more opportunities for gains due to uncertainty.    

About Total Wealth Management

Total Wealth Management (TMW) is a financial planning and advisory firm located in San Diego, CA serving clients from around the nation.  Co-founder, Jacob Cooper CFP®,  has no agenda other than what clients bring to the table as their agenda. Services offered by Total Wealth Management include asset optimization, risk management, estate planning, corporate retirement, asset management, and more.  The focus of TWM is helping people create a strategy that accomplishes their goals in the most efficient methods possible.  To learn more, please visit:  http://www.totalwealthmanagement.net

About Jacob Cooper CFP®

Jacob Cooper is a Registered Investment Advisor and CFP® who help clients reach a new level of financial well-being by addressing their unique financial situation and helping them to reach their objectives.  Jacob is the Co-Founder and CEO of total Wealth Management. 

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