On QE4 and the Perception of Wealth - Thirteen Asset Management

Pfäffikon SZ, Switzerland – Investors were confronted with some historical market movements this week. The market reaction was sizable and exceeded my wildest expectations. To think what the combination of margin calls and pointless computer aided trading can bring about… Is it not time that the marketmaker and the jobber go back to doing their jobs? Last week the Dow Jones lost more than 1000 points at its opening. Putting in orders before the opening is not very handy. Is this the harbinger of a long-term bear market? The doomsayers are sprouting up to scare you even more.

Market Reaction
In my view we’re dealing with a market reaction and not with an economic reaction. The economy is running better than you think, moreover the banks and many countries are in better shape than they were in 2008. All this means that it is much too early to write off the stock sector. Certainly with a 0% interest policy. What’s more, for the investor that is looking for long term value there was enough to be found this week. The decoupling between the market and the actual economic situation is simply overshooting. Mr. Market is a drunken psychopath, as you know, and also stands in for Father Christmas. The bull market is nowhere near over, even though historically speaking it is coming of age. The bull market came from very far in light of the crash in 2008. For that reason alone this bull market is not comparable to others and continues to live on longer than most would have thought.

US Recovery
All financial views have without a doubt been shaken. However, the economic recovery in the US and Europe has taken hold and is starting to take shape. For instance have a look at the ATA trucking index for July. That’s not to mention consumer trust in the US. My expectation is that towards the end of the year it will click for many investors that companies will be performing better in 2016 than this year. Moreover the presidential elections in the US in 2016 will give the markets an extra boost on the basis of the powerful Presidential Cycle. Naturally China will put a brake on all kinds of growth predictions, but writing off the gigantic country entirely is a step too far. Like was mentioned before a new middle class is emerging in China and this is a start and stop process. Do you have any idea what kind of purchasing power this will eventually bring? The remarkable email this week from Tim Cook – Apple’s CEO – is very telling.

Interest
And what are the central bankers doing? It should be clear that a rate hike in the US mid-September is highly unlikely, even though the Fed’s predictive power is terrible. Now that it has become clear to investors that there are also downward risks in the time we live in, central bankers will need to adjust course. The world is ridden with debt. This super cycle is running on its last breath and will sooner or later collapse like commodities right now. Now that volatility has returned to the markets, central bankers will postpone the exit from this tight spot. Perception of wealth on part of the populace plays a central role. And the perception of wealth shows a brittle recovery after years of central bank tweaking. Whether or not the route of central banking is correct, is a separate discussion; but what would be your alternative?

QE4
Central bankers know that this perception of wealth, at the current the time, must not be broken. That also holds true for the trifle matters sparked by China, margin calls and a rack of computers on tilt programmed by a bunch of teenagers. In the 1930s – during the real Great Depression – the Fed acted incorrectly by tightening too soon. It’s a mistake the Fed will not make again, especially not with 2008 fresh in their memory. The People’s Bank of China will not act differently. The most recent steps this week confirm their determination to reform. With that, QE4 is more likely than an interest rate hike. The serious end investor knows what to do.

It remains for me to wish you a good weekend.

Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the other above mentioned shares and has no intention of doing so in the next 72 hours.