QE To Infinity And Beyond

Sep. 18, 2012 2:09 PM ET
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Scott Minerd's Blog
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Bonds, Long/Short Equity, Alternatives

Contributor Since 2011

As Chairman of Guggenheim Investments and Global Chief Investment Officer, Mr. Minerd guides the Firm’s investment strategies and leads its research on global macroeconomics. Prior to joining Guggenheim Partners, Mr. Minerd was a managing director at Morgan Stanley and Credit Suisse. He is involved in leadership roles at a number of civically-minded organizations, including Cedars-Sinai Medical Center and Strategic Partners Among Nations.

A lot of news came out last week, the most significant being the decision by the German constitutional court, which is good news for the euro, and the U.S. Federal Reserve's unveiling of what I call 'QE Infinity'. Given that Dr. Draghi has changed the tone about the euro and the Fed has come around to an aggressive monetary policy, almost all of the upside surprises are likely now in the rear view mirror.

Last week's QE Infinity program is beyond anything that we have seen out of the Federal Reserve up to now. The Federal Open Market Committee's policy action announcements included the extension of Operation Twist, the open-ended bond buying program, and the extension of the low rate commitment by another year into 2015. This is all good news for corporate credit (defaults should remain low) and equity prices. Having said that, the trend of various asset classes being cheap and discounting bad news seems to have turned. For those of us who have been contrarians (i.e., optimists), there have been significant gains this summer. Now, it appears that many asset classes are discounting good news, which makes it worth reconsidering certain positions and exposures. Remember, consensus thinking is generally the path to underperformance.

All of this is especially significant considering that we are trading at historically low yields in many fixed income asset classes. I am not turning bearish, but the massive decline in rates in certain sectors - like high yield, for instance - will make future outsized gains more challenging. One area that likely still has room to move up is equities. If you compare last summer's rise from the August 2011 bottom to the peak in the first week of April 2012, the S&P500 rose 25%. If that trend repeats, based on the June 2012 lows, we can expect the index to reach around 1,600 during this run, versus the current 1,461."

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