By MICHAEL SPENCE And
Oct. 26, 2015 6:47 p.m. ET
How has monetary policy created such a divergence between real and financial assets?
First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy. The resulting risk-aversion translates into a corporate preference for shorter-term commitments—that is, for financial assets.
Second, financial assets are considerably more liquid than real assets. Trade among financial assets like stocks is far easier than buying and selling real assets like capital equipment. The financial crisis taught an important lesson to investors of all sorts: Illiquidity can be fatal. Financial assets have large liquidity benefits over real assets. In other words, it’s far easier to turn stocks into cash than to liquidate a new factory.
Third, QE reduces volatility in the financial markets, not the real economy. By purchasing long-term securities, the Fed removes significant market volatility from stocks and bonds. Any resulting reduction in macroeconomic volatility—affecting real asset prices—is far more speculative. In fact, much like 2007, actual macroeconomic risk may be highest when market measures of volatility are lowest. Central banks have been quite successful in stoking risk-taking by investors in financial markets, but have found far less success in encouraging risk-taking in the real economy.
Fourth, QE’s efficacy in bolstering asset prices may arise less from the policy’s actual operations than its signaling effect. Mr. Bernanke himself has said that QE “works in practice, just not in theory.” Multiple event studies in the U.S., Europe and Japan show that financial-asset prices move higher when QE programs are announced and implemented, and suffer when QE is thought to be ending. Clearly, market participants believe central bankers use QE, among other reasons, to put a floor under financial asset prices.
For real assets, the benefits of QE are far less obvious—and the results far less impressive. Weak economic data and mixed messages from the Fed in recent months only heighten our concerns about the trajectory of the economy and the sustainability of U.S. financial-asset prices.
2 OCT 23, 2015 2:24 AM EDTBy David Fickling
Sorting commodities into capital products that we use once, and operational ones we use again and again, helps make sense of what BHP Chief Executive Officer Andrew Mackenzie is up to.
Steel had a remarkable ride in recent years as China built 36 million new homes and a 19,000-kilometer high-speed rail network. Its main raw materials — iron ore and coal — took up more than half of BHP’s capital spending budget in 2010. That era is past: China’s production of rebar for reinforcing concrete peaked in June 2014, and the floor space of buildings under construction slowed to its most sluggish pace since at least 2005 in August. But while building work soars with a strong economy and plunges when it weakens, oil demand has remained relatively consistent for a decade: