QE: Quantitative Easing or Questionably Effective

We all know the S&P 500 Index has been on a 5+ year rally to all-time highs – thanks to ultra-low interest rates and the levitating wonder of “printing money” via QE – Quantitative Easing. Examine the following chart of the S&P for the past 20 years.

S&P_500_20_years_June_2014

If you were a member of the top 5 – 10% and had a large investment in the stock market, you increased your nominal net worth. However, if you were in the bottom 90%, then the wonders of QE did not “trickle down” to you and your family, except as higher prices.

Pension and retirement funds benefitted to the extent of their stock investments but they were hurt by generational low interest rates in their bond portfolios. Simply put, the stock market rally benefitted a narrow band of society – mostly the political and financial elite and upper middle class.

But how does the massive rally in the S&P look when priced in barrels of crude oil? Examine the following chart of weekly S&P divided by weekly Crude Oil prices – both smoothed with a 52 week moving average.

S&P_500_in_barrels_crude_oil_20_years_June_2014

That rally in the S&P, when priced in barrels of crude oil, does not look nearly as impressive. Remember – a small percentage of people benefit from higher stock prices, but everyone pays when oil prices rise. The price of crude oil affects food prices, gasoline prices, shipping costs, home heating costs, mining and manufacturing costs, and so many more.

When we look at the S&P in terms of crude oil, we see:

  1. The ratio is DOWN over 75% from its peak.
  2. The ratio has been essentially unchanged since 2006.
  3. The price of crude has risen for the last 14 years – much more rapidly than the S&P, along with a massive increase in debt and the money supply.
  4. A few people benefitted from the nominal rise in the S&P and most people were hurt by the rising costs of energy, gasoline, manufacturing, food, and so on.
  5. The overall US economy seems to be sputtering, unless you believe what financial television is “selling.”

So, have QE and the ballooning debt been a fantastic success or a Questionably Effective policy designed to recapitalize banks and the financial elite at the expense of most others, including pension funds, retirement accounts, savers, and bond funds?

QE looks like it produced a toxic cloud of dangerous mal-investment, debt and currency bubbles, higher consumer prices, and a weakened economy. But there is a golden lining in that toxic cloud.

gold_price_weekly_chart_20_years_June_2014

The price of gold has increased over the past 15 years, and will, thanks to the good folks who are bringing us more debt and QE, probably increase much more in the next few years.

Additional Reading:

 

GE Christenson | The Deviant Investor

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