QE and the Profile of Returns

An angel's smile is what you sell
You promise me heaven and put me through hell
--Bon Jovi

In his weekly letter, John Hussman makes an important distinction w.r.t. the effect of the Fed's QE programs on wealth redistribution. Although Fed policies have jacked prices risky asset classes higher, holders of those assets are only richer on paper. The value of their balance sheet assets has increased.

However, wealth will only be transferred if owners of those inflated assets take their trade. They have to sell those highly priced assets and convert the proceeds into formats that permit acquisition of more economic resources that before.

Ultimately, it is the stock of economic resources owned, not claims on those resources, that determines wealth.

Those who bought Tesla (TSLA) a year ago at 40 are only richer if they sell at today's inflated prices. They are no richer if the stock 'round trips' or worse while on their position sheets.

Rather than changing distribution of wealth, Dr J suggests that the Fed's programs are more likely to change the profile of returns. Return profiles change because QE and similar programs create a cyclical character to asset prices. In bubble-like fashion, QE programs first inflate asset prices, and then deflate asset prices.

Those who buy near the top of the cycle lock-in lower future returns while those who buy near the lows lock in higher future returns.

Stated differently, what Fed programs do is alter who is positioned to realize long term returns from stocks and other risky assets.

We can be confident that those currently holding those risky assets are not well positioned.

position in SPX