QE and Asset Prices

This is a graph from a Bank of England publication issued in Q3 2011 (*) [h/t Mauldin Economics]. It is a qualitative depiction of the Bank’s QE goals.

bofe qe impact

If we mash up Real asset price with Consumer price index we get an implicit forecast that nominal asset prices will be nearly flat for a long time after QE.

There is evidence we are near the end of the impact phase. Hussman and others have demonstrated the fading impact of new rounds of QE on asset prices.

Interestingly, the highly respected work of both GMO and Hussman (and others) on intermediate-term asset prices are now forecasting total nominal annualized stock returns of about 2%. Stocks yield about 2%. So their forecasts are for stock prices to be around today’s levels in 5-7 years.

Note that their approaches have nothing to do with QE. Instead they rely on quantitative methods based on historical data. So we see forecast convergence between a highly macro-theoretical approach and bottom up empirically-based models.

NOTE:  The graph is qualitative, so we cannot know the scales and indeed I expect that the vertical axis is normalized. Note that both Inflation and Real GDP must be rates. Iassume that those two rates are on the same scale while the other series are on another scale (e.g. all set = 100 at t = 0) (**). Given the context of the financial crisis I think it’s reasonable to assume the time scale spans about ten years – the paper was published a couple of years into QE and they still appeared to be operating in the “Impact phase”.

* Section begins PDF page 24, document page 200.

** The crucial assumption is that the Real asset prices and Consumer price index are on the same scale.

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