This morning’s note from Natixis offers the following resume about Quantitative Easing and what will eventually happen. I think the eventually is now:
If quantitative easing is effective, will it not inevitably lead to a financial crisis?
To be effective, quantitative easing must:
– Drive up asset prices above the normal level: central banks buy risk-free bonds, and this drives up prices of risk-free assets (bond bubble) and/or of risky assets (equities, real estate, corporate bonds, foreign assets) to an abnormal extent if investors switch from risk-free assets to risky assets. The excessive rise in asset prices is necessary to trigger the wealth effects that stimulate demand;
– If these wealth effects are powerful enough, they jump-start activity and, thanks to a fall in unemployment, ultimately lead to an acceleration in wages that contributes to an upswing in growth. We can then see the trap;
– If a quantitative easing programme is effective, the central bank must exit this programme and switch to a more restrictive monetary policy when growth returns and wages rise more rapidly;
– But since quantitative easing must give rise to asset price bubbles to be effective, these bubbles will burst as a result of this exit, creating the risk of a financial crisis.
This should give pause for thought about the merits (risks) of using quantitative easing.
If readers have a couple of minutes I urge them to visit John Hempton’s Bronte Capital. John is an Australian and has been known to nip up to China. He has published a devastating attack article on Alibaba (BABA on NYSE). This looks quite likely to be a massive fraud – it closed at $72 last night. There is plenty of borrow.
As readers know, the chairman has orchestrated a bid by Regent Pacific (575 on HKSE) for Plethora (PLE). Because in effect PLE is leaving here for HK and is larger than RP and because PLE punters do not wish to be involved in a HK quote, PLE is depressed (as has been pointed out by this morning’s IC). So I bought again – this time at 4.4p.
I was quite surprised by Pantheon (PANR)‘s decline yesterday but accepted that a weak oil price and general selling would have that effect. It was also pointed out to me that holders feared a placing – when that development is already in the price. So I bought again at 125.5p. Seemingly, flow rate test results are out next week. My short-term target remains 200p.
Pointless appointment: on the wireless this morning I caught the words of Dame Sally Davies, England’s Chief Medical Officer (no less), advising listeners to drink low alcohol beverages. This shows she knows nothing. Why does HMG appoint such people?