‘Reluctant’ Bulls And The ‘Psychological Risk’ Of QT

If you are one of the (many) people out there peddling a line about how QE “ended” years ago, please stop. Just stop.

Because you are lying to people. And you’re starting to sound like Donald Trump – that is, continuing to parrot something that you have been told repeatedly is a demonstrable falsehood.

Further, if you are a “professional” or a popular market pundit and you parroting this lie then you are even worse. Because everyone with any sense has every reason to believe that you are aware that you are peddling falsehoods and yet persist in doing so either out of self-interest or out of sheer, brazen stubbornness.


In any case, here’s the reality:


See that red line? Yeah, that’s “QE”. And clearly, it did not “stop” years ago.

Additionally, it is not a coincidence that the blue dashed line follows the solid red line. More amusing still is the fact that this isn’t a secret or a conspiracy theory. Central banks literally tell you this is what they are trying to do all the time. Go back and read Bernanke’s WaPo Op-Ed from 2010. He couldn’t have been any more clear about what global QE will do to stocks. And yet somehow, people persist in a fantasy world where they refuse to believe their own eyes and ears.

Anyway, Goldman is out with a new note this morning on “reluctant bullishness” and one of the topics mentioned is the likely effect of QT.

Here’s Goldman on why they “have sympathy” for clients’ reluctance to participate further in the rally:

First, the high level of equity multiples (especially on a cyclically-adjusted basis) means that a continued rally in equities from here is heavily levered to higher earnings.

Second, it generally pays to worry about “late-cycle hiking cycles”. As Rudi Dornbusch once wrote, “…none of the postwar expansions died of natural causes — they were all murdered by the Fed over the issue of inflation”.

Of course “the issue of inflation” isn’t as much of an “issue” this time around thanks to the fact that (apparently) structural factors are keeping price pressures subdued and thus perpetuating a kind of “Goldilocks” dynamic whereby growth recovers but inflation remains low enough to justify the continuation of accommodation.

But, Goldman says caution is warranted. To wit:

That said, the path ahead for monetary policy is not completely clear. For one, quantitative tightening (QT) may yet pose problems. When we query clients, quantitative easing (“QE”) invariably ranks high on the list of reasons for inflated asset market valuations. As such, there is ample reason to worry that its removal poses a non-trivial risk to market sentiment.

And while the bank says they “expect the effects of QT to remain exceedingly modest,” they go on to note that if market participants believe the removal of accommodation will be a problem, then it probably will be:

Investors often point to data such as that shown in Exhibit 2, citing the continued rise of global QE. Here again, we doubt that the global inflection, when it comes, will be any more disruptive than balance sheet normalization has been in the US thus far. But market narratives may dominate our rational analysis. If markets believe that global QE has been an important driver of the current rally, then its impending removal may nonetheless pose a psychological risk to investor sentiment.

‘The only thing to fear is fear itself.”

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