This column originally appeared on Real Money Pro at 8:48 a.m. EDT on April 15.
NEW YORK (
"The Zen philosopher Basho once wrote, 'A flute with no holes is not a flute. And a doughnut with no hole is a danish.'"
-- Ty Webb (Chevy Chase),
In looking back, the biggest surprise to me through the first three months of the year is that P/E multiples have expanded despite unprecedented secular economic and employment challenges, with growing evidence that the global economic outlook is eroding and that the bullish consensus estimates for
profits is in jeopardy.
Faith, Low Interest Rates and Liquidity Have Buoyed Markets
So far in 2013, the U.S. stock market has risen based on extraordinary doses of liquidity injections and growing confidence that global easing will trickle down, improving overall confidence, lifting jobs growth, buoying the world's economies and propelling corporate profits to new records.
There Is No Free Lunch
It remains my view, however, that there is no free lunch associated with the grand experiment of almost unlimited quantitative easing. It is as if the central bankers are trying to repeal the laws of investment gravity, as countries and regions of the world make a mad dash to debase their currencies in an attempt to spur export growth.
Monetary policy is camouflaging the underlying weakness in worldwide economic growth and is contributing to an artificiality in today's elevated stock and bond prices. Indeed, virtually all economic indicators point to weakness in March, as the fiscal drag (higher taxes, lower government spending and the distortion in traditional corporate hiring practices, owing to the implementation of the Affordable Care Act) that I have often written about has begun to show up.
I use the Caddyshack epigraph as a metaphor for the increased ineffectiveness and reduced influence of quantitative easing on our domestic economic activity.
Continued massive monetary easing in the U.S. has lost much of its overall marginal impact -- there is still little credit growth. With "QE Infinity" no longer producing a tangible influence on the real economy, more easing is much like a flute without holes that cannot be played or a doughnut without holes (not being a doughnut but rather a danish).
While many are certain that continued liquidity will feed a steady market climb into 2014, sooner than later, there will likely be an "aha moment," a moment in time when the aggressive monetary policies are recognized as not only impotent and ineffective but as likely having adverse unintended consequences (such as producing currency wars). At that point in time, natural price discovery will be reintroduced into the capital markets, and stocks and bonds will retreat back closer to intrinsic or fair market values, which I view as well below current levels.