The Federal Reserve’s quantitative easing (bond buying) program has drawn to a close. The era of easy, cheap money is coming to an end, so the argument goes…. And asset markets are going to suffer.
The bears told us QE would never end. And they said even if it did, stocks would fall. The bond bubble would burst. Asset prices would suffer. The “taper tantrum” of last year was just the dress rehearsal. Now come the fireworks. Right?
Not so fast.
From where I’m sitting, easy monetary policy will continue to dominate global markets well into 2015.
Why? Because the Fed ain’t the only game in town…
The Eurozone countries (under the single currency) account for roughly US$13 trillion of nominal GDP. To put that into perspective, the U.S is a US$17.5 trillion economy.
So what happens in Europe matters. A lot.
In our latest edition of The Churchouse Letter we pointed out that the European Central Bank (ECB) will be forced to ease monetary policy. And do so significantly.
And now the surprise move by the Bank of Japan to further escalate its own QE simply provides the ECB’s Mario Draghi with more ammunition. A couple more rockets for his monetary bazooka.
The ECB is on a course to inject one trillion Euro into the financial system via purchases of private sector assets. It is unclear as yet whether the asset purchase program will include purchase of European sovereign bonds.
The Germans are loathe to go down this path. But they will be dragged kicking and screaming to the bond buying party. Their hand is being forced by deflation, anemic growth, unemployment, and aggressive Japanese currency devaluation (Japanese exports become increasingly cheaper versus their Euro-priced competitors).
So we have two major economic blocks, Europe and Japan, launching forth with new and very large rounds of monetary stimulus.
And we’re not done yet. There’s another gatecrasher to the QE party…
Growth is slowing. The days of high single-digit GDP growth are over. They know it. So do we. But the slowdown has to be managed. Expectations are gradually being lowered.
However, global growth prospects are dimming.
Last month the IMF cut its 2015 Global GDP forecast from 4 percent to 3.85 percent. So Beijing knows their 6.5 to 7 percent GDP target is clearly at risk. Hence they continue to take easing measures. There were two rounds of liquidity injections in the past two months. They’ve pledged to lower funding rates for corporations. They continue to ease early restrictions on the residential property market.
And with inflation near a five-year low at 1.6 percent, they have plenty of room for more easing.
In short, I fully expect China’s policy settings to remain loose for the coming year given risks to growth arising from weakness in its major markets.
Elsewhere rates remain low. Last week the Australian central bank also voted to keep interest rates on hold for the time being. They are battling a huge slide in commodity prices and a 12 year high unemployment rate of over 6 percent.
And the Bank of England last week voted to keep rates at record low 0.5 percent…
Need more? The OECD last week issued the following warning:
“Financial risks remain high and may increase market volatility in the coming period. There is an increasing risk of stagnation in the euro area. Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth,”
It’s obvious to me that globally, we will continue to stare down the barrel of extremely loose monetary policy. Global liquidity will remain elevated.
I do worry about the long term implications of the scale of money printing that has already taken place, let alone that which is about to be unleashed. But I’ll leave the economic theory debates to the academics.
As investors, our job is to play the cards we’ve been dealt.
So how do we play this hand?
In terms of European equity markets, we made our recommendation in the most recent edition of The Churchouse Letter. I believe it’s the right way to ride the euro QE wave.
But another more simple position is this: be long the U.S. dollar, especially against the European and Japanese printing presses.
How to do that? Take a look at the PowerShares DB USD Dollar Bullish Fund (UUP US). This ETF shorts a number of developed currencies against the dollar for you. Right now it’s shorting 57.6 percent against the Euro, and 13.6 percent against the Yen… two currencies where we obviously see further pressure moving into 2015. The dollar has strengthened plenty so far, but there’s plenty of potential upside to go.