By John Richardson
I am becoming more and more convinced that more of Albert Einstein’s definition of insanity – doing the same thing over and over again, but expecting different results – is on the way: A fourth round of Fed quantitative easing.
This is the way in which I think this will happen:
- The long-awaited US interest-rate rise will occur later this year or in early 2016. Global stock markets will tank, emerging markets will descend into economic crisis and the dollar will strengthen.This will, of course, cause major problems for the US and global economies.
- “Blame it all on the Fed hawks” will then become the mantra, when the rise in interest rates will have merely provided the change in sentiment necessary to push the global economy over the edge. In reality this will have been a disaster just waiting for this final push because of the far-more important impact of China on the global economy.
- But US politicians will still fail to get this and so they will blame the Fed. US politicians will also continue to fail to address the US economy’s real underlying problems.
- The pressure on the Fed to go for QE4 will build and build after the next US President has been elected in late 2016.
- And as far as many of the Fed officials are concerned, they have staked their reputations on the efficacy of quantitative easing. So they will agree that the problem is not quantitative easing itself, but rather not enough quantitative easing.
- Before the end of next year or in early 2017 QE4 will thus happen, which will be backed up by more European Central Bank and Bank of Japan stimulus.
- We will then see oil prices surging to around around $100 a barrel and euphoria in global equity markets.
It is possible that the Fed doesn’t raise interest rates at all and instead opts directly for another round of QE4. This is also worth considering as it would very probably mean QE4 would happen earlier –perhaps even in Q1 next year. But I see this is as less likely because this would involve such a huge “about Face” for the Fed, given all its recent comments about an interest rate rise being imminent.
So what’s tipped me over into thinking that QE4 is even more likely than I thought was the case just a couple of weeks ago?
It is the persistently bad global trade data, and all the evidence pointing to weaker oil prices over the next 12-18 months – absent, of course, as I said another attempt at quantitative easing. One of the few genuine bright spots for the US economy has been the shale-oil sector and it is clearly suffering because of weak oil prices.
Global equity markets are also likely to take a real hammering in response to either a US interest-rate rise, or just this “drip, drip drip” of bad data. This again supports the “logic” of QE4, as the Fed sees the “wealth effect” from strong stock markets as a key positive of quantitative easing.
Another reason for my strengthened belief in QE4 was this fascinating interview in the Financial Times with John Burbank, who manages the Passport Capital hedge fund. The fund has been very successful in 2015 on taking short positions against commodities and emerging markets.
The interview included these three telling paragraphs:
The dollar rally caused by “asynchronous QE” — the early end of money printing in the US relative to Japan and the eurozone — and the economic fallout from a slowing China guaranteed a financial crisis in emerging markets that would rebound on the US, he said.
“All of that turmoil around the world will come back and slow down capex and hiring and consumer buying in the US, and that will make the Fed realise they should be easing and not hiking,” he said.
“I think we are on the precipice of a liquidation in emerging markets, and this feels the way that the fourth quarter of 1997 [the peak of the Asian Financial Crisis] felt.”
And Burbank was also right when said this is of the effects to date of quantitative easing:
“The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets.”
Enough already, surely? Sadly, no, I think QE4 will have to happen before central bankers and politicians wise-up and realise that this type of stimulus can never work.
But in the process of getting there we are going to be left with even more misallocation of capital, and so even greater quantities of bad debts and inflation.