QE Is Canceling Market Signals & Results In Malinvestments

Stanley Druckenmiller is the former lead portfolio manager from Soros and 149th richest man in the US in 2011. In a recent panel discussion on CNBC, he shared some critical insights that every investor or market participant should know about. Druckenmiller made fortunes in his investment career, and especially in 2008 as he was prepared for what was coming. He knows what he talks, so he deserves your attention.

We explained several unintended consequences of money printing (or in Central Bank jargon “Quantitative Easing”). One important thing not covered in our article, but rightfully mentioned by Stanley Druckenmiller, is the distortion of market signals. During the panel discussion, Druckenmiller explained it as follows:

If you print enough money, everything is subsidized: real estate, bonds, stocks, … We all think we are clever, but there is no reason bonds should go down if they are printing. If you look at the last three years, the Fed’s purchases have been about 75% to 80% of all the new issuance coming out of the Treasury. We used to say the Chinese were the largest buyers of Treasury debt; now it is the Federal Reserve. One of the frustrating things is that those bond purchases are canceling market signals. The bond market and the stock market have provided wonderful signals for many years as to potential problems, or potential signals.  When you cancel those signals, whether for Congress or the markets themselves, you could run into a problem.

Furthermore, Druckenmiller points out that the market distortion will result in malinvestments and misallocation of resources.

I thought we were done with wage and price controls back in the ’70s; this is the biggest price control of my life time. It is one thing to control short-term interest rates; it is another thing when you are buying 75% or 80% of the bond supply and holding that price down.  We had a lot of malinvestment and dislocations back in the ’70s. I think at some point in time we are going to find out, and it may be years, exactly where you had a misallocation of resources here. This is a big, big gamble to be manipulating the most important price in all free markets.

Mind how Druckenmiller is honest to admit he does not know for how long this situation will go on. The important words in his quote are “it may be years.” He is not only honest to admit he does not know for how long this market situation will go on, he also admits that the returns are disproportionate.

Let me just say one more thing about QE, because I think it pertains to this exact situation. I do not understand why people do not see QE as the biggest wealth transfer. We are all worried about rich versus poor. This is trickle-down monetary policy. Who gets rich from QE? People like me, people in the markets.

This last point was confirmed by a recent study which showed that the top 1% in the US captured 121% of all income gains after the 2008 crash (source: Huffington Post). The top 1%  became 11.2% richer while the bottom 99% got 0.4% poorer, when accounting for inflation, according to the study. These figures apply to the US. The US Fed monetary policy results widening the gap between rich and poor. We have written about this phenomenon very recently in Don’t Expect Our Leaders To Protect You – Do It Yourself.

The key take-away for individuals and investors:

  • This recovery is artificial, but it could go on for quite some time. Timing the popping of the next bubble is simply impossible. Manage your risks, carefully draw potential scenario’s and probabilities.
  • Be smart so you remain in the winning camp. Almost everyone is losing wealth … with special thanks to the US Fed.
  • If you want to win in these markets as an investor, more than ever you need to study and focus on facts & figures.
  • The fundamentals for sound money have never been better, in times like these where the markets are flooded with paper money. Because of malinvestments and misallocation of resources, even gold and silver prices can suffer (probably temporarily). Be prepared mentally.

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