Two headlines from the Financial Times last week say it all…without really saying it all:
‘Fed eyes first rate rise after end to QE’
‘Dollar jumps as hawkish Fed ends QE’
It’s important to get something straight: Quantitative Easing (money printing) hasn’t ended. The US Federal Reserve’s balance sheet will remain at roughly the same size for the foreseeable future.
By ‘foreseeable future’, I mean forever.
Money printing is the new normal state of affairs. Back in 2008 and 2009 when central banks first touted the idea, they met with a wave of controversy.
Today, massive money printing is ho-hum. There isn’t a single mainstream economist or politician who objects to it. If the Fed came out tomorrow saying it planned to expand its balance sheet by 100%, you wouldn’t hear a word against it.
Free Reports:
But for now the talk is how the Federal Reserve has ended money printing. That’s what the media and bureaucrats want the people to believe. Now the talk has moved on to the potential of interest rate rises.
What the reports haven’t really mentioned is what would happen if interest rates did go up…and if the Fed did shrink its balance sheet.
Well, tucked away at the bottom of an FT article is an insight of what would happen. It comes from none other than the father of stock market booms and busts, Alan Greenspan:
‘Meanwhile, at an event in New York on Wednesday, former Fed chairman Alan Greenspan said he thought it was impossible for the Fed to exit from easy monetary policy without market turmoil.
‘He said the Fed’s asset purchases, which it halted yesterday, had been a “terrific success” in boosting asset prices but had little effect in stimulating real demand in the economy. Mr Greenspan recommended investing in gold.’
Greenspan should know a thing or two about booms and busts. He became Fed chairman two months before the 1987 stock market crash. He was in charge as he helped engineer the 1990s boom.
He was still there as the dot-com boom turned to bust. And it was still Greenspan at the helm as the next era of low interest rates saw the market boom again.
He left office in January 2006. After that the market went through another 22 months of gains before topping out in October 2007…and crashing later the following year.
Unfortunately, despite his experience, he still doesn’t seem to realise the cause of the booms.
If he knew, he wouldn’t say that the latest round of money printing was a ‘terrific success’. It has only been a success in the fact that it has helped pump up asset prices.
But Greenspan knows one thing. He knows there will be turmoil if the Fed tries to raise rates. He may not know what causes the boom, but he sure as heck knows what causes the bust — higher interest rates.
Remember something I’ve long said: right now central banks consider the best way to solve the problem of low interest rates is to keep them low or cut them further.
That’s why there is almost zero chance of rates rising anytime soon…unless current Fed chairman Janet Yellen wants to create market turmoil.
In a way, a certain amount of turmoil has already started. Our resident value investor and sound money expert, Greg Canavan explained this to Daily Reckoning readers a week ago:
‘This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US dollar…which hurts sales of US multinationals.
‘It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if dollar strength persists…and the chart above says that it will, then you’ll see the strong dollar hitting companies’ revenue line in the coming quarterly reports.
‘Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.’
If cash returns to the US, it could come out of emerging markets. As the FT notes:
‘The broad-based decline in commodity prices, a drag on growth for commodity exporters such as Brazil, Russia and Chile, has been driven in part by markets expecting the end of QE.’
The question is how much of this is already built into stock prices?
Yesterday I pointed out how Brazil’s stock market bounced after the re-election of Dilma Rousseff as president. But the iShares MSCI Brazil Index ETF [NYSEARCA:EWZ] is still down 44.7% since late 2009.
Is there more trouble ahead for emerging markets? Or is this a perfect contrarian play? Perhaps now is the time to buy in to already distressed emerging markets assets.
I like both Argentina and Brazil as emerging market punts. They certainly aren’t markets to buy into with all your savings. But if you’re looking for beaten down growth plays, they’re worth considering.
This could be the time for an emerging markets rebound.
It’s not just emerging markets assets that have faced volatility due to the supposed end of money printing.
Tech stocks have been all over the place too. The NASDAQ tech index is up 9.5% for the year. But it most certainly hasn’t been a straight line gain.
As the following chart shows, it has been a wild time:
Tech analyst Sam Volkering doesn’t pay much attention to the volatility. He’s looking for transformational stock opportunities.
He knows that volatility is part of the territory when it comes to revolutionary tech stocks. As far as he’s concerned, if you have a part of your portfolio that you can devote to speculations, the tech sector remains a must-own sector.
Because, despite the volatility, one thing remains true: even in a volatile market companies (especially tech companies) are still deeply involved in amazing things.
It’s not for everyone. This is true high-risk speculation.
One of Sam’s favourite small-cap tech plays fits that picture. The market is risky, it’s volatile, and yet one tiny stock has snagged an $800 million military contract.
In short, the market could fall from here following the end of money printing, but don’t assume there aren’t opportunities to profit. In any market there are always opportunities to make money.
Kris Sayce+
Publisher, Port Phillip Publishing
From the Port Phillip Publishing Library
Special Report: Return of the Wildcatters: One area off the coast of the Philippines contains up to 380 million barrels of oil. A hardened team of Aussie drillers holds exclusive rights to extract it…and they’re going for every last drop.
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