Saturday 16 December 2017

Max Doyle: Short view

THE S&P 500 index has risen by about 13 per cent in value over the past two months and looks set to keep rising into year end. And 2010 may well be another double digit return year, on top of the 20 per cent delivered in 2009.

Granted, 2008 was a disaster, with a 34 per cent loss, but is it now time to accept the argument from stock market disciples that, in the long run, equities will outperform?

Not QED just yet but perhaps Qe2 explains the recent bonanza. Qe2 or Quantitative Easing part 2 describes last Wednesday's attempt by the US Federal Reserve to stimulate the US economy and job creation with a $600bn injection.

Qe is a fancy term for creating money out of nothing -- in fact, no money is ever created but a series of journal entries and paper swaps results in lower long-term interest rates and theoretical excess cash which banks can lend.

Usually, Qe results in inflated prices of shares, commodities, and risky assets, and Qe2 did not disappoint.

But with job creation stirring in the US, was Qe2 really necessary?

There is no question that it is a desperate measure, akin to turning on the presses and printing new money with abandon.

Could it be that the US has figured that a dose of inflation is a way for a highly indebted consumer society to repair balance sheets, without deleveraging, whilst continuing to spend.

With such overt manipulation of the US equity and bond markets now apparent, investors would be well served to trust their gut instincts.

Max Doyle is a principal of Prime Focus Management Ltd specialising in investment and turnaround of Irish companies

Sunday Independent

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