The QE4 Rally has started and it’s important to understand possible implications. It’s also important for our 80/20 community to understand why central banks are easing. Global growth is not good. We need to keep that in mind when making major personal financial decisions.
Japan Follows Europe Igniting the QE4 Rally
European Central Bank instituted negative interest rates last year. So when the ECB met recently, and did not ease any further, despite european economic weakness, markets weakened. ECB statement did mention that “more” needed to be done.
This wording encouraged stock buyers. However, in the past couple of weeks, the stocks of European banks have taken a dump. Not to be outdone, the Bank of Japan announced this morning that they will try negative interest rates. Disappointing growth and lack of inflation were cited as reasons to bring out the monetary policy equivalent of the Wave Motion Gun.
Wave Motion Gun from Starblazers – via Warosu.org
Negative Rates?
Central banks charge negative rates on the money on deposit from member banks. So if XYZ bank has 300B in extra reserves on deposit, the BOJ or ECB will charge them money to keep it there. The idea behind this is to spur lending. And to spur economic “growth.” But there is a reason banks aren’t lending. Demand. Or the potential borrowers are unqualified.
Therefore, “forcing” banks to lend by punishing them for keeping excess deposits at the central bank is foolish. We know what happens when we lend to unqualified borrowers. But perhaps we just forget. Or think THAT won’t happen again (2008).
Looking for Inflation = Looking for Trouble
Another point equally as dumb if not more, is the central banker’s quest for “inflation.” I am not sure the thinking behind this. I did major in economics but that doesn’t help. Here’s my guess. In the twisted world where politics crosses with policy and tools, people come up with odd ideas.
Perhaps in the past, price appreciation of goods to consumers accompanies economic growth (We use GDP in the US). Therefore, if price increases accompany growth, we can just boost prices and get growth! Genius!
Look at this quote from today’s Bloomberg article:
“This clearly shows the BOJ wanted to weaken the yen and raise the price of import goods and boost inflation,” said Daisuke Karakama, an economist at Mizuho Bank in Tokyo. “We don’t know this negative rate policy will be good for the economy in the end,” he said, adding that success in Europe doesn’t guarantee the same for Japan.
Ok I know my readers are not economists, but can you tell me how increasing the prices of imports would HELP you? How does more expe Japan is targeting price increases for the sake of increasing prices. Maybe they think growth will accompany that. But how could it?
Do you see how ridiculous the “science” of economics is?
QE4 Rally is the Next Step in Our Projected Gameplan
For those of you who are regular readers here or get my newsletter, you know what I think is going to play out. And my thinking is heavily influenced by great macro finance thinkers such as Bill Fleckenstein (primarily) and others. Here is what I expect:
- Economy weaker than most people think: check
- Eventually people will begin to realize this and market will weaken: check
- Fed will not be able to raise rates without crashing the stock market and more: looking like a check
- Fed will reverse course: recent minutes – no urgency to raise rates but nothing concrete. But other central banks are currently taking the reins on this. Europe, Japan, Switzerland, Sweden, China
- Market will rally on Q4 – happening now; Euro and Bank of Japan cranking it up for the US to add to later. Market is acting like QE4 as many companies disappoint on earnings, GDP was weak in 4th quarter but stocks are UP BIG today and moving up this week.
- This QE4 rally will run out of gas
- The real correction begins
- Maybe: Fed brings out the monetary Wave Motion Gun
The Real QE4 Fun Begins Soon
As you can see from the final bullet points, things don’t look too good. In my opinion. The QE4 Rally will just lead to the bigger short.
Investors will follow the Pavlovian playbook and buy stocks. It worked last time. Heck The BOJ is buying stocks directly! But history rhymes. This time, we may see something different. Why?
What’s so Bad? Nothing, Except Everything
We are at 0% rates at the start of the downturn! Not good. And companies have tapped out the financial engineering tank. Not sure how much more borrowing and buying back stock they can do. They’ve fired enough people between 08-2012. Now we have employee cost pressures. Wage demands. Higher health insurance costs. Stronger dollar. Higher interest rates (for now). NO REVENUE GROWTH. All will eat into US company profits.
I’m not sure how long this rally lasts. But likely not too far past a commonly watched moving average on a stock chart. Whenever it ends, the next time down will have no rescue.
Winners Are Takers
via US News
I’ve mentioned this before. But the winners in today’s economy are the ones taking revenue from others. Seems obvious but some people mistake success of the takers for economic growth. We are simply shifting resources around.
Amazon takes business from Target, Walmart, etc. Facebook is taking business from local newspapers and other advertising venues. Google the same. Netflix is taking from Comcast. Just look at the growth vs contraction on each side.
This does not equal economic growth. People are saving money and paying less for stuff. but this means fewer career jobs. And more money going to fewer players. Software IS eating everything as Marc Andreessen has said. We will be more efficient but growth may not follow. Growth comes from more people and more people upgrading their lives.
Many Americans for example are underemployed. Many are making money running around as a Taskrabbit or Uber driver. Good money. But this is a new economy change. Incomes are not as good as a solid old time job oftentimes. And benefits don’t exist. And others have been cut out permanently from the economy – barring a huge change in their career.
QE4 Action Plan
The final part of our thesis has gold being the ultimate victor. Mainly because it’s the least manipulated “currency.” But it’s possible good money will be made shorting the QE4 rally. Though I am not 100% certain that this is the QE4 Rally. It may be a preamble. Because stocks could launch if the US Federal Reserve follows with easing steps.
But it’s possible that the buyers then are buying NOW. Ahead of any Fed moves. If that’s the case, then any Fed announcement to ease would be a “sell the news” event as people already bought in anticipation.
If we do get a nasty correction, it could be a great time to hire a deep value money manager to run some of your assets. As these guys can really clean up after market collapses. More on this is a topic for another time. But gold stocks may be timely.
We shall see. If our thesis does work out, with gold stocks priced for death, we could easily see 500-1000% gains in gold stocks once they get going.
Gold Stock Chart Strategy
2 Year Chart GDX via Yahoo Finance
And it looks like gold stocks are trying to put in a bottom, but the chart is too short term to be definitive. The downside potential “false breakout” or “fakeout” is interesting. However, if I had no gold position, I would start one here. But that’s just me. For full disclosure, my clients are 3-5% exposed to gold stocks, up from 2% a couple of months ago. Personally, I have much more exposure to gold and gold stocks. Gold stocks are about 6% of my portfolio with gold being about 10%.
For me that’s a good base position and I will add on trading signals from here to control my risk.
If you’re curious what I am doing specifically, feel free to contact me. Or find out more about working with me if you’re considering an advisor that thinks the way I do.
Thanks for reading!
