While it seems like everyone in the market that cares about QE is talking about whether there will be a taper in December or in March, Ray Dalio’s hedge fund, Bridgewater Associates, thinks there’s a bigger issue to consider.
Bridgewater thinks the real question is whether QE is going to keep working whether we want it or not.
In fact, Bridgewater thinks the policy may almost be out of gas right now.
In its ‘Bridgwater Daily Observations’ note the fund laid out its vision of a world where the taper is irrelevant and the Fed is basically out of policy options.
The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed. So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.
We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation. So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won’t matter that much. What will matter much more is the efficacy of Fed stimulation going forward. In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.
So calm down with the taper talk, guys. It’s time to get worried about something we haven’t imagined yet.