QE impact on equity prices

Updated: Mar 5, 2020

The Macroeconomic Context of 2019

According to a concept of technological paradigm, popular among the leading economists, the steady and crisis technological periods change each other through the mechanisms of depression, capital addition and the cardinal changes in the system of price changes in the economy. During those periods of 15 years length, there is a change in the price structure, sets of leading countries and industries, as well as the principles of economic metrics.

The periods of economic bubbles are getting replaced by the periods of steady economic growth with the pace of development. In economics, Kondratiev waves are hypothesized 45-60 years of generational cycles of invention seeds, expansion, and depression. Currently, we are at the beginning of the 6th wave of the post-informational technological revolution (Internet of things/renewable energy transition, nanotechnology) (2015–2035?). The innovation seeds of these new technologies have taken place in the previous cycle.

The periods of economic crisis are also the periods of outstanding opportunities for developing countries when they can jump on the growth path of the new technological order and get ahead in development. China is an example of such an economic miracle.

How are technological and global economy patterns manifesting themselves today?

Here is the illustration of the scale of the global derivatives bubble since the beginning of the the last great financial crisis struck in 2007-2008. According to OCC, U.S. Department of the Treasury, the top 25 banks in the United States in 2018 had a $206 Trillion of exposure to derivatives. The top 5 banks, including JPMorgan Chase Bank, Citibank NA, Goldman Sachs, Bank of America Na, Wells Fargo banks NA, are accounted for 93% of this amount. Derivatives value exceed its underlying asset value in 23 times. In the same time, the value of assets are not increasing with years.

What is behind of these numbers?

The major-country central banks have adopted a monetary policy, a quantitative easing (QE), whereby a central bank buys Treasury bond, government and mortgage bonds from the banking system in the U.S., corporate bonds and stocks in Japan, corporate debt in Europe. The aggregated money for those three- FED, BoJ and ECB -$15 Trillion in 2018. The Bank of International Settlements (BIS), or central bank of all central banks, repeatedly warns the danger of crisis 'relapse'.

How does QE impact equity prices?