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Registered Investment Adviser Caleb Lawrence

After a volatile opening the major averages settled down and enter the final hour with modest gains, on little real news. The New York Fed regional index fell 6.9 points in September to 49.7 on weakness in sales and employment. Bucking the trend of other regional and national manufacturing reports that have risen of late.

In the post bust period since 2008 the world’s central banks stepped in and amongst other items to stem the global financial collapse engaged in Quantitative Easing or QE. At the time I joked with a friend of mine, “what do they think they are going to do, buy everything?”. It turned out that joke was on me as essentially that is what transpired. While successful in arresting the economic collapse at the time and reflating assets prices of all stripes nearly worldwide, it came at a cost. Huge increases in debt, public and private, the Federal deficit has essentially doubled in the post crisis period and now exceeds 20-Trillion, that’s with a “T”. Most forms of debt have either surpassed their pre- bust highs or are very near to doing so. With the end of 2017 in view we are essentially back where we were in 2007, dangerously overpriced assets nearly everywhere you look, record levels of debt that once again is about to meet not enough income with similar results. It is the distortion of asset prices wrought by QE that are most troubling. A fine example comes from Europe where High Yield or Junk Bonds now pay less than the 10-Year US Treasury Note. 2.3% for junk paper subject to significant defaults and losses particularly if the economy goes south again, and 2.34% for the Treasury Note considered to be one of the safest and most liquid investments available. From a historical perspective the interest rate spread or difference between the two was 9% as recently as 2012. This speaks volumes about the pricing, and by implication risk distortion that QE has created in the financial markets. Another particularly pernicious side effect of this is that investors and savers in the hunt for yield or investment return have subjected their portfolios to ever increasing amounts of risk, exposing them to significant loss if things go south once again, an event that is all but certain.


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