A contrarian call worth listening to:QE4
Extracted from Businesstimes:
“By April 2014, the Fed’s balance sheet will have grown to US$4.4 trillion (5.2 times bigger than in 2008) and officials will decide enough is enough, success or no, Mr Carbon quipped.
But the Fed could U-turn if housing prices fall, with QE4 aimed at the housing market, he said.
The Fed has been buying US$45 billion worth of houses every month since September 2012 – that’s five times the value of all new homes being purchased each month.
When the Fed stops buying all those houses, sales will begin to drop, Mr Carbon said.
“Prices (will then) start to fall. GDP growth starts to fall – to 0.5 per cent in 2Q14 and, according to forecasts, below zero in 3Q14.
“(New Fed chief Janet) Yellen’s in a pickle. Promises to keep Fed funds at zero forever fall on deaf ears.
“The Fed has no choice: it pulls a U-turn in September. QE returns, with asset purchases aimed entirely at the housing market. Markets dub the U-turn QE4,” Mr Carbon added.
The incoming Fed chairwoman last month said that interest rates will remain low following tapering, which the market seems to have absorbed.
But Mr Carbon expects QE4 to be greeted with chaos, rather than cheers.
“Markets do not cheer QE4. On the contrary, they cower. Why? Because the Fed and the economy are now stuck, seemingly permanently, between a rock and a hard place. QE? You can’t live with it; you can’t live without it. Growth was weak when you had it – and even weaker when you get rid of it,” he said.
“It turns out the bond market isn’t a sell after all. Ten-year Treasury yields, which jumped to 4 per cent after tapering began in April 2014, fall back to 1.5 per cent by December. The S&P 500 ends the year at 1,200, where it stood at end-2011.”
On Europe, Mr Carbon is sceptical, and predicts it could be almost zero growth for another two years.
“When Europe reported positive GDP growth in 2Q13 – the first time in six quarters – many assumed it would continue to accelerate towards 1-1.5 per cent growth. We were, and remain, sceptical,” he said.
He also does not expect Abenomics to follow through as structural reforms in Japan will be stalled – as they have been the last 20 years.
The market will finally realise the G-3’s ultra-expansionary monetary policies are no panacea.
“The hypothesis here is that in 2014 everyone realises that ultra-expansionary monetary policies were nothing but a great big placebo; they never ‘fixed’ real economies. So markets that had assumed otherwise become ‘unfixed’, unglued, uncooperative,” he said.
Asia will have to rely on itself to drive its growth as it has done since 2008.
Since the collapse of Lehman Brothers five years ago, the US, Europe and Japan have gone nowhere. Asia has continued to grow at nearly a 7 per cent rate – about average, in other words. In the five years since Lehman collapsed, Asia “added” 1.25 Germanys to the economic map, right here in Asia.
“Even with China’s ‘slower growth’, Asia puts a new Germany on the map every four years. That Asia was capable of driving its own growth used to strike many as heretical; today, it’s conventional wisdom,” Mr Carbon said.
“We think Asian markets will outperform in 2014, given the expected growth differentials and given how kind/generous markets were to G-3 economies in 2013. We do not expect them to be so kind to the G-3 in 2014,” concluded the DBS Bank chief economist.”
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