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.
What if he presses for it?
This is his last chance before he potentially loses his job.
I like to think, even after QE3, so what ?
After QE3, there will be QE4, QE5 and so on. Why do you even have to think so hard about this one… 🙂 The world needs a new monetary system – we appear to be at a breaking point again like in the 1970s with the Bretton Woods. If we try to avoid making the same mistakes from history, then anything commodity based is out. Likewise, a fixed exchange rate regime is out. A monetary union a la euro, is even more out. The only new wave thinking is the IMF’s SDR which is what China is vying to get into – to get the Renminbi into the SDR basket. We then need the IMF to run like a central bank… And we will trade e.g. SGD/SDR, MYR/SDR etc. USD does not go away entirely because it will be a component inside the SDR basket. But you need the IMF to print more SDRs to circulate to the rest of the world. The SDR is now a currency for the central bank world – it is the unit of accounting for member central banks to settle their business with the IMF. That’s why it is called Special Drawing Rights – SDR.
For now, this system looks quite a good idea. If an SDR member currency runs into trouble, the IMF can review it and change the SDR basket composition.
You can bet that there will be troubles down the road with such a system. It’s only a matter of timing. There always will be troubles because mankind can never resist making troubles, can we?
We are at QE3 only? I thought it would have be QE100 by now… I am surprise that the Feds are still considering QE, I am just not convinced how another tens of bps is going to make any difference. Market is just trading on hope.
The current monetary system is just broken. We need a new way to allocate resources optimally. Sounds radical perhaps but it has happened before. Heck, we have seen it in the last 100 years…
Maybe we don’t have to worry so much because the ice caps are melting. The good thing is we can recover trapped oil now and burn more of those stuff! Yay!
Mankind is indeed always looking for troubles.
Agreed. Bernanke is dull with age. Maybe he is smart enough and trying to get himself fired now so QE will end as his legacy.