Surviving the QE freeze
Can we really believe Bernanke when he said he’s all ready to ramp up QE again? Even so, the question right after that would be “so now what”. Basically, QE has reached diminishing marginal return and at some point, it will turn into negative return. That is why most estimates of QE3 are north of USD1trillion. You can continue to devalue the USD but frankly, there is no other winner. In a way, this is the comfort the US gets for becoming a serial QE like Japan. Europe will continue to muddle through a slow death if members choose to stick with solidarity. Theirs is defnitely a problem badly in need of cash from the helicopter. Unfortunately for the world, China is in recession by its own definition. With a leadership change underway and a witchhunt doing the rounds, the country’s top government officials to mayors and village heads are not acting on any stimulus spending. Self preservation is on high alert.
So frankly, now is not the time to short USD. If the Fed does QE, it will be just enough to add a bit of fuel to its own recovery but not enough for the rest of the world. If the Fed does not do QE3 on 13 September, then we better get ready for a long QE freeze as it’s politically incorrect for the Fed to embark on QE too close to the presidential election. Which means we have a good 5 months to wait out a QE freeze.
If you look at the Asian cross currency basis market, you will find that every market has tightened a lot with no real strengthening of the spot rate against USD. Plainly speaking, we are flush with a lot of USD liquidity now, a lot relative to our domestic liquidity. That will easily go away if Bernanke chickens out of QE on 13 Sep.
So stay long USD/ Asia for the rest of the year, buy USD on dips.