The Price of QET: "QE Topless" (aka QE3)
Preface from dshort: Bill Hardison sent me the commentary below, which he had playfully entitled "The Cost of QET". At first I thought the title was a typo for "QE3". But Bill explained:
I used "QET" as an acronym for "QE Topless" -- QE without a top. The ECB already used "unlimted", so we need a more interesting acronym than just "QE3".
Fed Chairman Bernanke has talked and written about three primary transmission mechanisms whereby QE programs should help the economy. One is of course, interest rates. Transmission mechanism #2 is boosting the wealth of average households. The third rail of QE is making US goods more competitive abroad. I believe even the Chairman would agree that he means boosting stock market prices and weakening the US dollar, but these sound somewhat less noble. Can we look for the footprints of QE programs, past and present?
What we pay for anything will fluctuate due to a number of factors: supply and demand, technological improvements, and the value of the dollar, to name just a few – so it's a multi-factor moving target. If we were to look at something that has had relatively the same input costs stretching back in time, you could do worse than pick the price of a daily newspaper. Whether you're talking about now or a hundred years ago, the costs to publish the paper were pretty similar: paper, ink, office space, salaries of reporters, etc.
Here is a very small table showing inflation at work for the last 112 years:
That's quite a bit of inflation – but is it realistically that much? What if we added gold?
Hmmm, that's pretty close! Actually, January of this year was the last time the New York Times increased the cover price. If they had nudged it up by just an additional 7.5 cents per issue, the two percentages would be nearly identical. If we didn't want to use The New York Times as an official benchmark of value, we might use the price of gold.
Let's take a look at our market priced as the number of ounces of gold one share of the S&P 500 costs since the beginning of the year 2000. This is somewhat arbitrary and the price of gold fluctuates quite a bit, but as we saw, it does seem to pace some other measures of inflation over time fairly well. This chart catches the S&P about 4 1/2 months before the important market top of 2000 and, arguably, the start of a secular bear market. In this chart, the S&P is plotted on the left axis and gold ounces are the right axis. In rough terms, if the S&P was trading at 1500 and gold was $300/ounce, it would cost you five ounces of gold to buy one share of the S&P 500. That was roughly the case in April of 2000.
You might note two troubling things from this chart. The first is that the stimulus efforts to get us out of the 2002 bear market didn't get us vary far in gold terms. In fact, by the second time the S&P revisited that same 1500 area, 2 ½ ounces of gold would buy it. The second is that the stimulus efforts to get us out of the 2009 bear market not only didn't get us very far in terms of gold, it didn't make it anywhere near to what it was at the last market trough in 2002. With new market highs last week, we're nearly revisiting that 1500 area again – but this time we don't even need a whole ounce (0.83 will do it). At the bear market bottom in 2009, it was 0.73 ounces, but it only took 8 days from that low for the S&P to price at more than 0.83 ounces – so you could say that since the market bottom on March 9, 2009, we've already recovered 8 days of value in terms of gold! Yow!!
We could zoom in a bit on the above chart and look at that relationship since QE2 was hinted at in Chairman Bernanke's Jackson Hole speech in late August of 2010. Now we would be including QE2, Operation Twists 1 & 2, a whole ranging of easing programs from Europe, China and Japan – and finally QE3.
All that easing boosts the S&P by about 40% but its value in gold ounces stays relatively flat (actually a loss of about 2%). Note, also, the sharp turn down in ounces in the last 10 days. Letting Excel draw a linear trend line for the last two years, you can see that this doesn't look encouraging either. I think we could all agree that past easing programs have negatively impacted the US dollar and boosted the apparent gain of the market – but how real is that impact?
(c) Bill Hardison