In a recent interview with Financial Sense Newshour, David Zervos, Chief Market Strategist at Jefferies, explained how QE is meant to reflate asset prices and why that implies US markets are likely to underperform since the Fed is no longer engaged in QE (and expected to tighten) while other markets provide stimulus. Zervos also comments on the evolution of the "QE hater message", as he calls it, in response to the ebb and flow of inflation data.
Here are a few excerpts from his recent podcast interview (preview below). Subscribers can access the full audio by logging in and clicking here.
QE's Job Is to Reflate Assets
"QE for all intents and purposes basically does the job it is set out to do, which is reflate assets. I don't think that's a particularly controversial statement—I think the controversy centers more on the efficacy of QE as it relates to the economic outcomes. In that sense, we try to highlight that over the last 5 years, since 2010, the U6 unemployment rate (the widest measure of unemployment in the United States) has fallen from 17% to 10%. It's previous low was 8% in the last cycle so we're only two percentage points of the cyclical best of the housing bubble period."
Evolution of the QE-Hater Message
"In the beginning, most people who hated on QE...were really focused on this monetary expansion and what it might do to inflation. So the original QE haters sort of believed that this very large monetary expansion was either 1) not going to work [and lead to a Japanese-style deflation] or 2) going to create this huge hyperinflationary outcome. And the 'this is not going to work crowd' was very popular in 2009-2010...[but] about 2011 as the headline inflation rate pushed up toward 4%, which coincided with a very significant peak in commodity prices—strong oil in particular—the deflationary doom-and-gloom camp turned into the hyperinflationary Zimbabwe camp... But since 2011, inflation has basically been on a downward trajectory...[and] slowly but surely you've weeded out these hyperinflationist haters that were very popular... Now the hater community seems to be more focused I would say back on the deflationary/disinflationary outcome and maybe the impact that these types of policies have outside of the United States, say what they're doing in emerging markets and the like, so if you can't find a reason to hate at home you just head abroad because hate sells and that's what these guys like to do."
Abandoning 5-Year Bull Call on US Stocks
"We spent most of this year arguing that the US was not the right place to be investing in terms of the risk asset space and actually we didn't particularly like much at all in the US asset space. We felt that the unwind of the greatest monetary policy experiment in history was probably going to be difficult to understand and communications around Fed policy were going to be fumbled up and that there would be quite a disconnect between the actual reality of what the Fed was going to do and what expectations were going to be around that... So in Q4 of last year we abandoned our 5 year-long bull market call for US risk assets...and advocated a long risk asset trade in Europe this year, a continued long risk asset trade in Japan, something that we have been pushing since late 2012...and we used a currency hedge which is shorting the euro, shorting the yen, buying the dollar and owning the risk assets in Europe and Japan..."
Listen to this full interview with David Zervos by logging in and clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.
