QE - Horses for Courses


by Carolyn Herbert

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Ken Hyman, Tano Pelosi and Mark Kiely of Antares Fixed Income discuss the different retail savings and investment characteristics of Japan and Europe versus the “English-speaking” countries and the different consumer responses to Quantitative Easing in these countries.

Ken Hyman: Today we’re going to discuss QE, but particularly why the slow coaches such as particularly Japan and Europe, have struggled to get any real traction out of the QE programs. Particularly in contrast with the English speaking countries, such as the US and the UK.

Tano Pelosi: I think QE works in different ways for different places Ken. So you take the English speaking countries for example, with their love affair with debt. Clearly they’ve done very well out of QE, particularly the way house prices have risen, asset price appreciation. And then you look at other countries like say, the BOJ Japan, they’ve relied more on the currency channel to do their heavy lifting. And then you look at the situation with the ECB in Europe; it’s been predominantly a lending channel.

Mark Kiely: I’ll just add to that I think. If you look at the saving bases in those countries, if you look at Japan as you mention, roughly 70 per cent of their savings are sitting in fixed income and cash, and now you’ve got negative yields. It’s really starting to impact against that savings base, the pension funds, the life insurance reserve money and the banking sectors. Similarly in Europe, huge amounts of money are sitting inside a fixed income in cash markets, in contrast to the US or Anglo countries, where a lot of the savings base sits inside property and equities. So that QE’s really put the impetus into the price structures of those asset classes and helped I guess, flow through to the wealth effect. And I think that’s part of what we’re seeing in those countries.

Ken Hyman: If you look at Europe and you look at their saving habits, you have bonds and deposits. So the financial repression of QE, where savers are being hurt and borrowers have been advantaged, so Tano I agree with you to say that those, the biggest borrowers, those who are comfortable taking on the debt such as the Anglo countries, have done well. But in Europe at the moment, it is now raising its head that there are no real winners out of QE. But there are winners, the winners are corporates, the business community have done exceptionally well, as we know.

Mark Kiely: You can talk about targeted QE approach and I think that’s very valid, but I think also there’s probably a recognition starting to develop now in the markets. It’s probably a consensus that QE’s been ineffective in distributing the wealth effect, across the broader economies. I guess things like BREXIT, things like the rise of Trump and the anti-establishment type vote, I think is part of that story. So yes, targeted QE could be part of the solution, but I think there are other sort of government toolsets. I think fiscal policy is definitely one coming to the fore at the moment, in discussions. In the American electoral cycle, we’re seeing both Trump and Hilary Clinton talk about fiscal expenditure.

Tano Pelosi: It’s interesting, because I think the political world may not be there just as much as say, the willpower wasn’t there for central banks to overstimulate, when they had the opportunity early on. So I think what we’re really picking up on here in the markets is just a lack of credibility, coming through from central banks and just the despondency, in the way that they’ve actually gone about this. When they had the opportunity, they really should have done a lot more.

Ken Hyman: But looking forward, what are the tools we’ve got available? So Mark I agree and we’ve talked about fiscal spending for sometime now in a couple of these chats. And yes, it may come through in the US and there’s no doubt that fiscal spending is most probably the best inflationary spur. Much, much better than these low interest rates, history has shown that it does. So you’re probably most likely going to hit your inflation targets, whether you get the growth, you’re going to get some employment.

Are there any other tools and what do the Europeans do, because the Europeans have got these split economies? You’ve got Germany on the one side, they don’t need the stimulus, German business confidence what the recent figures show, it’s the highest level for eight or nine years. So Germany’s fine, but the slower areas of Europe need everything they can get. So I do despair a little bit for Europe.

Tano Pelosi: Furthermore Ken, I mean there needs to be structural reform, because even though I would argue the bank lending channels, the way QE would work with ECB in Europe, it’s still a very fractured banking system. You go across the jurisdictions from one country to the next, you’ve got very different sort of bank lending rates. So it’s hard to see, without a harmonised banking system, how you can get real effectiveness out of QE through the banking channel.

Ken Hyman: And just a quick one guys, back at home base here in Australia, I mean how do we fit in? We sometimes say we haven’t had QE here, but we’ve had it in spades. We’ve just had the second third order effect. They export the QE; we get that institutional buying, retail buying out of Japan. Buying up bond yields down to levels way, way below where domestic investors are comfortable to hold them. So we have had that QE coming through. Going forward, do we need a shift as well, do we need a shift?

Tano Pelosi: Well we do, because we really haven’t delivered since the GFC. So whilst we can look with a critical eye to Europe and Japan, they have delivered to some extent through their austerity measures. Australia’s debt to GDP is as high as it ever has been. So I think we need to look elsewhere to pick up the slack.

Mark Keily: One thing that’s going to come out of it where we’ve seen the final effect is obviously house prices, it’s obviously all over the media. Up roughly say 90 per cent across the major capital cities, certainly Sydney and Melbourne, less though Australia wide, only about 70 per cent in the pre-GFC period. But that’s huge amounts of price appreciation, that’s one of the big kickers I guess of the average Australian wealth story. Equity markets, superannuation funds – similar sort of story there, so that’s certainly floating through.

The next stage I guess, in my mind, is what replaces the weakness we’ve seen in the resource sector. And to date we’ve seen the Aussie dollar doing some heavy lifting there, with regards to the East Coast sectors. And I think there is also a little bit more to be done from the Government sector as well, in that space.

Ken Hyman: All right guys well I think we’ve given that a good crack on QE, and I don’t think we’ve come with the great solutions. But until we chat again, over and out.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presents the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.