Lai See

More quantitative easing means bubbles are back

PUBLISHED : Saturday, 15 September, 2012, 12:00am
UPDATED : Saturday, 15 September, 2012, 2:16am

Clients sitting in on the teleconference of one large bank yesterday morning were slightly surprised at the frankness of the bank's message, following Ben Bernanke's announcement overnight in the US of a resumption of quantitative easing. The message was simple and to the point: "Please close your eyes and buy. Thanks Bernanke." This simple takeaway was then passed on throughout the market, to become the message of the day.

There were some variations on the message as it was passed around, such as "if you've got the money, buy flats; if not, buy stocks and gold." Others took a longer-term view and wrote, "Now close your eyes and … Bye," meaning that following the bust of the inevitable bubble, it's going to be bye bye jobs and probably a lot more as well. Hard to know whether to laugh or cry.

The Katy Perry factor

The finance industry isn't going through a particularly good time at the moment, and things are likely to get worse. But you didn't get that impression from CLSA's end-of-investment-forum party and its Sweet Temptation theme. Hundreds of people, food, drink, exotic dancers - and the awesome Katy Perry topping the bill. In her retro polka dot '50s look, she was like a supercharged Madonna, though without the raunchiness. She's got a great voice, good songs, plenty of energy and was good entertainment. And her exhortation to the audience "to make out with a stranger" struck a sympathetic chord. She now has at least one more fan.

CLSA is coy about how much these events cost, but we've been told that it gets it back within about five weeks through commissions. Fortunately, recently weak markets will be underpinned by the resumption of quantitative easing.

Mao was wrong

Russell Napier, a strategist for CLSA, talked yesterday in his press briefing at the investors forum about the huge capital outflows from China. Noting there was a net outflow of US$72 billion (since revised downwards) on its capital account in the second quarter, he said this was a big and important question. "Why are the Chinese getting their money out while foreigners are queuing up to get their money in?" It is a recipe for disaster and is a bad sign.

The main reason, he believes, is because the return on capital employed (ROCE) is declining. ROCE for the listed sector in the US in 2007 at the peak of the previous cycle was 13.5 per cent, and this year it is virtually unchanged. The figures for China were 15.6 per cent in 2007, falling sharply to 10.7 per cent this year. It's a bigger decline than in Europe, where ROCE was 13.1 per cent in 2007 and 11.7 per cent this year. Napier warned that if this trend continues it would put pressure on the currency. He said the mainland's practice of funding the banks on negative real interest rates was unsustainable.

Napier said the porosity of the capital account is going to cause difficulties for the authorities. "Mao was wrong when he said political power grows out of the end of a gun," he said. "Power springs from capital controls." When this starts to unravel, so do many other things.

Faber predicts gloom shock

To round off a week of almost unremitting gloom for the future of the global economy, Marc Faber, as the final keynote speaker at the CLSA investor forum, added his particular interpretation on the doom that awaits us all. Bernanke's announcement of the resumption of quantitative easing was all grist to his mill.

"When you print money it benefits few people," Faber said. "Those with assets such as property and stocks get richer, while the rest see their cost of living rise while their wages do not go up commensurately."

The impact of quantitative easing is temporary in that it boosts consumption for a while but does not create sustainable economic growth. So what should governments do? "They should resign and reduce government by 50 per cent," Faber says. In Europe and the US, the government accounts for roughly half the economy, but he says whenever it exceeds 18-20 per cent, the effect is negative and economic growth is stifled. However, it is difficult for democratic governments to do the right thing, he said, citing the Luxembourg politician, Jean-Claude Junker: "We all know what to do, we just don't know how to get re-elected after we've done it."