Stocks near 5-year high despite worst earnings season since crisis

I was discussing this with a few friends online a couple of weeks ago and now it’s all over the news. Earnings have been poor, yet stocks continue to push higher.

One argument was that “the key is deleveraging the banking system in an asset-inflationary manner. So, the Fed is indeed in control. There is a discrete amount of QE that achieves this outcome.”

My counter here was that “it won’t work. Recession is coming and asset inflation will be overwhelmed by real economy deflation in a New York minute. A new recession will be asset deflationary as well as real economy deflationary and that could mean bank failures. In that sense, the Fed will have failed. it will have failed to pump up the real economy on a sustainable basis. It will have failed to prevent a debt deflation that causes bank failures. And ultimately I believe it will have failed to promote sustainable asset reflation.”

I finished writing “I just don’t think the Fed is going to go guns blazing until it’s too late. I agree that extending to 2015 is a likely response. But if there’s no QE the markets will not be happy. When the Fed realises it has failed, it may start buying other assets like municipal bonds. But by then asset prices will be falling. The QE we have witnessed thus far will have failed.”

That’s still my argument.

Video on this dichotomy below


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.