Mark Yusko, CEO of Morgan Creek Capital Management, offers a quarterly review (see full PDF here) of U.S. and global financial markets. One of his topics in this quarter’s review was QE – why it happened, what it really means, how will new Fed Chairperson Janet Yellen handle the situation and what might happen when QE ends.
The truth about QE
Yusko starts by debunking claims about QE such as QE has created a wealth effect by increasing equity prices, which increases spending and drives growth. He points out that while this might sound like a great theory, there is practically no evidence this is happening. The fly in the ointment is that the average American doesn’t own stocks (except for the minority with a 401k), and therefore, the average American is hardly participating in the wealth effect at all. The truth of the matter is that it is all accruing to the financial institutions and the top 1% who own practically all the financial assets.
As for the myth of the wealth effect causing increasing GDP growth, the on-the-ground reality is the opposite – growth is slowing to a crawl as the trillions of dollars printed by the Fed just sit on bank balance sheets while banks speculate in government bonds to bolster their profits. Yusko also points out that all this liquidity in the system has led to systemic imbalances that are exploited by financial institutions. For example, JPMorgan Chase & Co. (NYSE:JPM)’s bond traders have made a profit every single day in 2013 – it’s more profitable to exploit a broken system than making loans to small businesses…which of course would lead to creating jobs, increases in wages and ultimately to consumer spending and GDP growth.
Small caps the place to be in Q3 2013
The Morgan Creek Capital Q3 review also pointed out a significant trend that has not garnered much attention. The third quarter was gangbusters for small caps. The Russell 2000 (INDEXRUSSELL:RUT) was up an amazing 10.2% – more than twice the S&P 500 (INDEXSP:.INX) or the ETF (SPY) – and is up a mind-boggling 27.7% for 2013 so far. The Russell Microcap Index also increased by a scintillating 11.6% for the third quarter, and a flat-out spectacular 32.1% for the last 12 months.
Fourth quarter projections
Yusko says all that is needed right now is a steady hand at the helm, and a continued vigilance for significant macroeconomic changes. He continues to be noncommittal to neutral on U.S. and major European equity markets as they appear to be overvalued by a number of standards. He contends that both Japan and the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) still offer opportunities in Q4.
Full PDF can be found here and is embedded in scribd below.