Global 'QE glut' to brim through 2015 as funds swim with the tide

By Reuters

Nov 24, 2014 10:07 PM EST

If the world's biggest central banks were actually coordinating a global monetary policy, they could scarcely do a better job of convincing financial markets right now.

Just two days after the Federal Reserve halted six years of bond buying or 'quantitative easing' last month, the Bank of Japan shocked markets by expanding its own massive QE stimulus.

Three weeks on, European Central Bank chief Mario Draghi insists his bank will move "as fast as possible" to raise euro zone inflation using all means available - something financial markets now assume will involve buying euro government bonds.

On the same day -- fearful of the threat of deflation on ballooning domestic debts -- the People's Bank of China surprised by announcing its first interest cut in more than two years.

Coincidence or not -- coming either side of a G20 summit in Australia -- investors are now convinced a dogged fight against deflation is under way around the globe from Tokyo to Frankfurt and Beijing, even as the U.S. Federal Reserve heads in the other direction and mulls raising interest rates.

Intriguingly, that policy divergence could have unintended consequences for both world inflation and the United States if the upshot is explosive U.S. dollar strength.

A sustained rise in value of the world's reserve currency -- now widely expected -- would depress commodity prices and global inflation even further while tightening financial screws in slowing emerging economies and dragging on U.S. exports.

In the absence of an instant boost to global demand, this by itself could seed even greater easing, prompt the Fed itself to postpone its own rate rise and pump up assets even further.

As a result, investors have rarely been more comfortable betting on continued buoyancy of developed-world stocks and bonds and increasingly see it hinging on the sum of policy of the 'big four' rather than pivoting solely on the Fed's actions.

"Money is fungible. Money that is printed in Japan doesn't just stay in Japan," Franklin Templeton's star bond investor Michael Hasenstab told clients on Monday.

For money men and women trained not to fight the committed actions of central banks and the overwhelming power of printing presses, the threat of deflation destabilising a world still shouldering much of its pre-crisis debts is now front and center.

"The mixture of a QE glut, a savings glut and secular stagnation means that interest rates will stay extremely low for a long time," said Pascal Blanque, chief investment officer at the $1.2 trillion Paris-based asset manager Amundi. "We will continue to navigate that glut next year."


Blanque reckons the key thing that central banks are telling the world is that you cannot engage in extraordinary monetary policy half-heartedly. Once outside the traditional rule book, they now have to ensure success in staving off deflation.

"When you embark on QE you have to hit, hit and hit again for some time. It's a question of volume, commitment and time," he told Reuters 2015 Investment Outlook summit last week.

If QE was originally aimed at preventing a devastating post-credit crisis paydown of excessive debts that would have drained the world's money supply, central banks cannot now allow those who retained or assumed those debts -- their governments for the most part -- to be penalised for doing so as deflation sets in.

Sustained falling prices makes the real cost of debt rise into the future and questions whether it can serviced.

This is why even speculative funds are still reluctant to call anything other than fleeting market downturns as long as the collective central bank stance of the world is on green.

"Everyone likes to turn up at cocktail parties and call turning points but I don't think we're seeing one. The printing press may change but it's the same environment," Luke Ellis, president of hedge fund firm Man Group, told Reuters.

For some, QE needs to gain traction soon in the real economy because it is proving politically and socially divisive to date.

"QE was meant to flow into the economy in two streams -- the asset value side and the consumer side," said Saker Nusseibeh, chief executive at Hermes Fund Managers. "But it has just been pouring down into the asset side."

"We've had the largest QE in modern history and it's only half worked."

Perhaps the hardest thing for many investors is that they know QE has distorted prices, they're not convinced of its success and yet they need to go with the financial market flow or risk losing money in real terms anyway in near-zero yielding cash deposits.

"If the price of money is wrong, it's hard to price any asset class against it. It's easy to see risk everywhere, but it's hard to see what is a higher risk or a lower risk," said Aberdeen Asset Management CIO Anne Richards.

"There is a day of reckoning. I just suspect it's not 2015."

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