Post QE world
Central banks are moving closer towards monetary normalization, a post QE world.
How do investors prepare for a post QE world and perhaps even benefit from all that money creation?
Twelve trillion dollars of QE and the lowest rates in 5,000 years has distorted asset values and created paper asset millionaires, billionaires.
Most of the central bank’s money creation, unprecedented in the history of finance went to stabilize the financial sector and in so doing benefit the one percentages who tend to be already asset class rich. But the Fed’s balance sheet still amounts to $4.2 trillion and all that talk of quantitative tightening QT has yet to play out. So QE had an impact on financial markets spurring the longest bull market in all assets where stocks and bonds unusually rallied together. Moreover, the correlation between workers wages and real estate prices in most major metropolis became irrelevant in the era of QE.
Then it would not be irrational to believe that this post QE world, or quantitative tightening QT, which has yet to play out, is likely to also have a major impact (the inverse effect QE) on markets.
Perhaps that is why there has been a raft of world top investors warning about a pending market correction in this post QE world.
But until the central banks are able and willing to keep creating currency and buying up financial assets, this bull market (ruled by fiat and not fundamentals) can keep running.
However, ruled by fiat (the central bank’s currency creation) has a future so long as investors don’t have a viable alternative and the central bank keeps their credibility, trust. There have been many instances throughout history when the central bank has lost trust and its fiat currency has become literally worthless. A history of fiat currency collapses.
To put it simply, central bankers have got monetary policy badly wrong with devastating impact on their currency rendering it worthless.
So investing in tangible assets is one way of surviving the post QE world
I am not suggesting that hard currencies will not survive the post QE world. Nevertheless, all that currency creation is very likely going to debase (depreciate) the exchange value of the central bank’s fiat currency. For example, if economic output remains the same and currency creation is ramped up that means more fiat currency chasing a finite amount of goods and services with the end result of pushing prices higher.
The post QE world could usher in hyperinflation and if so the price of tangible assets could protect investors against the rising risk of stagflation.
Warren Buffett bought a railroad for a good reason. During the Weimar Republic crisis, the German industrial class invested in machinery in anticipation of a currency collapse.
Tools, machines (tangibles) could protect you in a post QE world.