How does QE tapering affect income?

In the continuous efforts to taper QE, Panicko Lawrence, Vice- President for the Private Client Group, Regent Consultancy, has shared his market views. He said that the US is about to tackle the long term effects of QE when the decision to taper it finally culminates. It would have been ideal if the US had not engaged in quantitative easing at all but since the deed has been done, then the focus should be on how to successfully taper it without bringing down the economy.

When the Fed announced an impending tapering, the bond market has taken a turn for the worse. This is due to the backing that the financial market has been relying on since QE was introduced and the prospect of losing that prop is daunting. Investors are already acting prior to the decision or action of the Fed and bond ETF’s are suffering major losses.

The problem, according to Panicko Lawrence, is that whenever QE tapering is about to start, the long term rates rise and the supposedly sure and slow recovery of the economy is endangered. QE is in itself easy to manage and even easier to begin but just like an addictive vice, it is hard to stop. When it was initially introduced, the positive reviews and predictions of long term benefits were touted by economist all over the US. As it progresses, they have awaken to the possibilities that it is not the perfect solution that it was initially thought to be. In fact, it may turn out to be more damaging to the economy once it is eventually fully withdrawn.

However despite the certain implications brought forth from different sections of the economic world, there is an amazing disregard for the consequences and risks of QE tapering. The discussions and economic papers being circulated do not focus on the risks and ill effects but more on what is happening on the present. This is alarming in a sense that if no one pays attention to what the future will hold without this crutch, the house may come tumbling down.

It has been observed that even after the interest rates were at zero, the economy still has not recovered.  This means that even with the use of QE, there is no increase in money supply because business and households are not attempting to borrow money.  QE perpetuates the belief that there are few risks and the balance sheets are showing an accurate picture. Panicko Lawrence says this is deceiving and will showcase a more comprehensive result when QE is ceased.

While the prices of equities and real estate are increasing, it does not put much of an influence on the economy of the country. There is no significant increase in the spending of the wealthy sector. There has to be a movement from the masses to get a significant change like middle class citizens trading their houses for a bigger one and borrowing against their equity. Another factor would be if they become players in the stock market.

Therefore, income investment is going to be a real challenge going forward but it does not indicate that the income theme has met its demise. History shows that there is an optimistic trending for income related assets.

Panicko Lawrence provides some opportunities for income in an environment with inflating rates.

The leading dividends given by defensive stocks may not be as strong as it has been and is in danger of being outmaneuvered by the broad index. Prices for bonds are predicted to go down which in turn will have a negative effect on fixed income instruments. A study of diverse income assets show that the outcome differs even when placed into the same setting with rising rates.

What came out at the top after a 3 month rolling period, were the stocks with high dividends with convertible bonds trailing closely behind. Fixed income assets as well as US REIT’s also did a good job.

Tapering, according to Panicko Lawrence, should not be an instantaneous or striking experience. It has to be done via a gradual process in order to minimize the interference in the market. If the economy is rallying and the incomes are coming in, then it can progress. But if there is a negative impact on the market, then it has to be halted.

Panicko Lawrence said it does not mean tapering is a terrible act and it is definitely not an ending to QE but more of a process that can be slowly taken just like a thread that is carefully unraveled.