Why Do So Many People Hate QE?

Why Do So Many People Hate QE?
Outgoing Federal Reserve Chairman Ben Bernanke managed to thread the needle yesterday.
Bloomberg, December 19, 2013

Farewell QE, you have been a magnificent success:
The moral contours of QE depend on your angle of vision. But would you rather be surrounded by mass unemployment?
–Ambrose Evans-Pritchard, the Telegraph, Dec. 18.

Outgoing Federal Reserve Chairman Ben Bernanke managed to thread the needle yesterday, announcing a modest monthly taper in quantitative easing of “only” $10 billion dollars, while leaving the remaining $75 billion in monthly bond purchases untouched. He also suggested the Fed will keep rates accommodative — read very low — for even longer than previously promised.

Rather than crash (as was so widely predicted), the markets took off: The Dow industrials up 1.84 percent (292.71 points), while the S&P 500 gained 1.66 percent.

While we do live in interesting, even fascinating times, these many disparities raise this interesting question: Why do so many people hate QE?

Here are the six best answers to that question I can muster:

1. Dislike of the Fed: There exists a near pathological hatred of the central bank. Whether it’s Ron Paul’s “End the Fed,” or Texas Governor Rick Perry’s embarrassingly silly accusation of Bernanke’s treason (“we would treat him pretty ugly down in Texas“), a cottage industry has sprung up around a strong anti-Fed meme. If the Fed is evil, anything it does must also be evil. Hence, QE is the work of the Devil. Call it “Central Bank Derangement Syndrome.”

2. Wrongly Positioned: Equities: A huge swath of market participants have not been properly positioned to profit from market upside. Hence, the relentless bubble talk, crash warnings, end of days chatter. You should have no doubt that this rally will end someday. In the meantime, find a better source of criticism than the sour grapes of those folks who missed most of a generational 170 percent (and counting) U.S. equity rally.

If you have been wrong on emerging markets for the better part of a year — like I have — find a better use of your time than penning 10,000 word missives on what’s wrong with the European Central Bank and World Bank; perhaps even reconsider your market position. In other words, Trader, heal thyself.

3. Rightly Positioned: Goldbugs: Gold, long rumored to be the hedge against the Fed’s inflationary, currency-debasing policies, continued its relentless fall. It is now a few ticks above 1200 — don’t be surprised to see an “11” handle on it soon.

The Goldbugs may be the most vocal group of QE haters. Despite the massive printing, repeated QEs, and endless stimulus, their long-awaited collapse of the dollar and hyperinflation has failed to materialize. “Don’t worry” we are assured, it’s coming. Only it has been almost four years since they first warned us of this. Yet since its 2011 highs, gold is spitting distance from a 40 percent fall.

The problem with the gold story is that the facts have changed but the narrative stayed the same (See this, this and this). That is a sure-fire recipe for failure.

4. Ideology: There is a contingent that believes smaller government — much smaller — is ideal. Anything outside of the private sector is suspect, and that goes double for the secret, wealth-confiscating central bank. They lecture about this, write op-eds, make predictions. Only, as we discussed last month, their 2010 forecast that QE = Currency Debasement and Inflation has simply been dead wrong. Even worse, there has not been so much as an admission of error or even an acknowledgement that perhaps their models (or beliefs) might be are wrong. Their cognitive dissonance just makes them hate QE all the more.

5. Job Confusion: There seem to be an awful lot of asset managers who have forgotten what their jobs are. Instead, they have become think-tank wannabes, and Monday-morning policy wonks. That is a luxury for people who are not entrusted with other peoples’ wealth.

Misunderstanding just what their jobs are can be a hazardous problem. This is a favorite peeve of mine. As I noted last year (“Where Sea Monsters Live“): “Anyone who toils in the markets professionally or manages money for other people does not get to enjoy such a lavish, self-indulgent luxury. Their job is not to opine on such matters, but rather, to manage cash in the environment that is — the world that exists presently, and is likely to exist in the near future. It is not their role to manage money based on the way things ought to be.

6. Fixed-Income Investors: This is the most legitimate criticism of QE. If you rely on your bond portfolio, QE has led to a radical decrease in income. There is less to this than meets the eye, however. Bond investors are still living off the fat of an enormous 30-year bond bull market. Second, many bond investors (at least that we see) have profited handsomely from the equity side of their portfolio. Too many folks complaining about poor Grannie’s weak fixed income yield are disingenuous to say the least.

The bottom line is this: There are plenty of reasons to be unhappy with the bailouts, rescues, zero-interest-rate policies and quantitative easing. But too many people have despised QE for all the wrong reasons.

Perhaps the best summing up the latest Fed posture was written by my colleague Josh Brown, who tweeted yesterday:

Roses are Red
Dahlias are Black
We’re buying less bonds,
but we still got your back.
– Happy Holidays from the FOMC

That should give the Fed-haters something to think about over the holidays.

Originally published at Bloomberg, December 19, 2013