QE Delenda Est

Quantitative easing is not making everything easy...Discuss.
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MSFT just announced 3000 layoffs.

I’m sure MSFT will have specific reasons for doing this, but I’m gonna generalize here and pin part of the blame here on QE/ZIRP/NIRP: It’s bad for jobs and it needs to end, now. It’s contributing BIGLY to the lowflation/low-productivity/low-wage riddle.

Allow me to explain:

- QE/NIRP/ZIRP helped inflate global asset prices; everything looks cheap, especially if you’re using models, as rates were compressed peeps started looking for better places to park their cash etc, you’ve heard this before...

- As asset prices, specifically stocks, continue to rise, dividends need to rise in lock step to keep dividend payout ratios constant (or growing).

- Corporates used QE/NIRP/ZIRP to clean up their balance sheets in the aftermath of the 2008 mess. But then they started levering up again, and you’ve all read about borrowing at super low rates to buy back shares etc. (see chart below of US corporate debt as % of GDP, not a bad early warning for recessions either…)

- Problem is, as asset prices continue to rise your dividend payouts need to rise too - it’s a beauty contest after all, and these days high and rising dividend yields are your “best assets” (and Keynes rolls over….). To meet those rising dividend payouts you have to make more revenue, we’re in a low growth economy so good luck with that. So we’re left with borrowing at zero AND/OR cutting costs. We keep hearing that wages are too low and companies are not investing in capex etc, could this be part of the problem?

Screen Shot 2017-07-06 at 2.57.01 PM

- And here’s some more data to back this up, below is a screening of S&P 500 companies with dividend yields greater than their EPS growth; 154 companies are paying more in dividends than they take in. And of those 154 companies, only 14 actually have positive earnings growth. That’s a little less than 1/3 of the index…

Screen Shot 2017-07-06 at 2.57.20 PM

- Then you have the problem that QE is just depressing… month after month, year after year, we hear “experts” at Central Banks around the world mope about "slow" and "moderate to modest” growth and inflation trends etc… They also been moping about how the Phillips Curve hasn't been very effective in predicting wage inflation, and yet they still don't recognize the simple fact is that labor just doesn't have the bargaining power that is used to. It’s all very depressing, all this moping doesn't make me want to run out and invest and hire people (this is kinda what Abe and Kuroda tried to do in changing the “tone", but to hear them, it’s just more of the same…!). In their defense there’s obviously little pizzaz to take out of the data (though there was more last year when they really should have started normalization), and yes they have their dual mandates (at least the Fed does), but the tone needs to change, and we’re kinda starting to get that feeling from Ol’ Yeller. Problem is it’s maybe too late, the present recovery is late stage and the Trumptrain aint coming to the rescue with fiscal/structural boosts…

We’ll get more clues from Yellen next week at her Humphrey Hawkins testimony to Congress, so far the moves higher in yields have been led by the EU (where you actually have inflation and growth. #MEGA!!!), could be we start seeing some leadership from the US as well. I don’t envy her position, it’s not going to be easy to move towards normalization in a low growth environment, but it must be done.

We’re in a QE trap and we have only ourselves to blame.

Mouthy Macro Trader is an actual trader who will be sharing his thoughts with Dealbreaker from time to time. You can respond to him in the comments… he can take it.

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