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Q2 2021 Review. From Extreme Distortion To Unstable Dysfunction.

Q2 2021 Review. From Extreme Distortion To Unstable Dysfunction.

One way to look at whether QE has distorted asset prices is to create a ratio chart. The chart below shows that this ratio of the S&P 500 to the Fed balance sheet has been remarkably flat since 2008. This looks a little different from the chart of the S&P which as you know is making spectacular new highs.

Is QE simply distorting asset prices while the underlying economy continues to deteriorate? It’s worth taking a look.

Investors should consider to what extent they are just investing in central bank liquidity management rather than stocks! To the extent it is liquidity the Federal Reserve is now reaching the point where the extreme distortions they have created are about to turn into unstable dysfunction.

The Pandemic crisis created another round of twin deficit policy inspired “stimulus”. This policy is only possible with similar support from equally massive QE and lower interest rates to make it affordable. How well has this policy worked for the last 70 years in terms of actually supporting long term  US economic growth?

The chart below shows real growth in the 3 time periods marked below. Growth fell from around 4% back in the 1950s to 3% into the 1990s, and then down to 2%, although we have not yet seen the full consequences of the latest “stimulus”.

No question there is a pattern of lower highs and lower lows.

The failure of policy is evident from the ever rising scale of intervention on each economic “rescue”. While the current rescue approach, which has now become permanent, does provide temporary economic relief, it ends up only weakening the economy in the longer term.

So large is the global official asset  buying, central banks now overwhelm all other categories of buyers in terms of scale, and have become price setters for markets. Markets have completely broken away from normal relationships and signals and now simply reflect distortions. The economy has lost the value of price signals for information value. This leads to poor economic decisions and investors are now faced with the worst set of investment return options in history.

The Treasury Bond market is now fully 80% below the regression line indicated by current core CPI.

All assets are priced from Treasury bonds. According to a Boston Based institutional Investment manager, GMO, the markets now present investors with the worst long term prospective returns in history.

The distortions are now so large and the policy failure so great that the Federal Reserve faces a catch 22 situation.

Can’t address inflation. They are unable to tighten policy sufficient to defend their own currency from inflation, as higher bond yields would likely crush the economy.

Alternatively, if the economy were to weaken. The scale of intervention to       “support” the economy may now constitute a hyperinflation risk.

The central banks have painted themselves into a corner with few good options. Investors are beginning to see this problem articulated by Goldmoney and Ray Dalio here:

“The Fed finds itself between a rock and a hard place: either it keeps inflating or the whole confidence-based valuation of financial assets collapses. Either it raises interest rates or the dollar collapses.”

It has never been more important to manage your investments like the Best Investors, with the focus mainly on risk management.

Investors now need to empower and transform themselves to Best Investor metrics as soon as possible.


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Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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