Two weeks after we celebrated the 25th anniversary of the start of the TBTF era (courtesy of two Nobel laureate economists and a famous bond trader who received a $3.65bln bailout from fourteen financial institutions at the behest of the Federal Reserve on Sept 23, 2023), today we celebrate an even more famous anniversary in the annals of central planning: as DB’s Jim Reid reminds us, today marks the 15th anniversary since the start of the QE era.
Some more excerpted from the Deutsche Bank strategist’s birthday celebration report (full note here)
It’s 15 years this week since TARP finally got passed through Congress at the second attempt. Although the financial crisis was in full flow by then, this legislation arguably marked the point where central bank asset purchases became mainstream. G10 balance sheets totalled around $5tn at this point, having slowly reached this over centuries of history. By the end of 2021, this figure was close to $30tn. These are now declining given QT and various other run-offs. Currently, this is having the greatest impact on government bonds as reduced demand (which QT is a big part) has met higher supply.
Given that TARP marked the point that asset purchases became mainstream, it’s worth looking at asset performance from that point across the globe over this 15-year era. We’ve ordered by local currency returns but have shown a dollar return bar for non-US assets. As you can see the dollar has had a very good run over this period, depressing global asset returns in dollar terms. For reference though, all of the below in the text is in local currency terms.
Undoubtedly, US equities have been the star turn with the NASDAQ and S&P 500 returning 14.3% and 11.3% p.a. over this 15 year period in total return terms, respectively. This is above the 10.4% p.a. that the S&P 500 has returned over the last 100 years. However, we would note that both are broadly unchanged (very slightly up) since QE stopped last March.
Equities elsewhere have done ok, with the STOXX 600 up +7.6% p.a., and the MSCI EM index up +4.1% p.a. For the STOXX 600 that’s a bit better than its long-term trend since the late-1980s, but the MSCI EM has underperformed its previous trend.
Bonds have been poor performers, which is a legacy of the index rebalancing repeatedly at lower and lower (near zero) yields in the 2010s. Yields are generally around the same level as they were just before TARP so the poor returns are not because of the yield on offer back then. The long-term 100 year return of 10yr USTs and Bunds has been 4.8% and 4.1% p.a., respectively. But over the last 15yrs they’ve been at 1.9% and 1.7%, respectively. So while QE directly purchased them, the reality is that eventually so much QE and government spending occurred, that ultimately inflation and supply have overwhelmed bonds in return terms.
With all the talk about commodities of late, it’s interesting that Oil has gone nowhere and the commodity index overall is slightly lower. In our long term studies we always show that commodities rarely outperform inflation over the long-run apart from in specific rare periods where they out-perform everything.
So in the QE era you’ve wanted to own equities, especially in the US, but be light on exposure to bonds even though that’s what central banks have been buying. Despite the ultimate reflation, commodities have been very poor. One exception is Gold, which has done quite well with a +5.1% p.a. return over the last 15 years (last 100 years 4.7% p.a.). This makes some sense given the QE currency debasement.
Now we’re out of QE and into QT, bonds have been the first casualty. Can equities retain their strong performance from this era? The bulls would argue that QE had limited impact on them and that it was earnings that drove the returns. The bears would argue that equities have tracked the broad ebbing and flowing of QE closely over the last 15 years and have overall gone nowhere in this QT era, hinting that they’ve been starved of liquidity. Something that’s unlikely to change soon.