- The FED is making excuses. Its latest dovish comments blame the labour force numbers even though 295,000 jobs were created in February.
- I believe that we will get QE4 in the US which will be huge. If this takes place at the same time international central banks tighten, the dollar will fall
- If inflation really takes hold in the US, there is very little the US can do to stop it.
US stocks rallied hard on Wednesday of this week as the FED announced that it will be less aggressive in raising interest rates. Bonds, equities and commodities all rallied hard but the dollar practically fell off a cliff as it lost close to 2% against other currencies. I hope this weakness alerts traders and investors alike what a possible QE4 would do to the greenback if it were announced in the future. So why did the FED come out with this dovish comment on Wednesday? Also why did it use the weak labour market as the main reason for adopting “patience” with its interest rate policy? I couldn’t understand this especially after the US announced the creation of 295.000 new jobs in February. When this number was announced earlier this month, the dollar rallied hard due to expected tightening from the FED. It doesn’t make sense. However when you analyze the FED, you realize that many things it says doesn’t make sense. Let’s go through this article and discuss my reasoning why a dollar crisis may be on the cards and how you can prepare for it
Firstly why should you believe the FED? It announced back in 2012 that it would raise interest rates when the unemployment rate dropped below 6.5%. We now stand at 5.5% but yet the FED hasn’t budged. It has also said on record that it will act when inflation is above 2%. I don’t see this happening either. Look we are now 6 years into this so called recovery but the FED hasn’t acted. I think there is a far bigger possibility of QE4 taking place in the US this year instead of an interest rate hike. Every bit of economic news coming out of the US is negative with the exception of the job numbers. Furthermore I believe many investors are going to get caught on the wrong side of this trade as all bubbles end badly.
Most investors and financial media alike believe Europe is weak, Emerging economies are weak and the only economy that has shown strength of late has been the US economy. This is partially true as we can see GDP figures from the US along with lower unemployment numbers, etc. Many investors forget though how the balance sheet of the FED has had to be expanded massively in order to arrive at these figures. As a result of the “so called” recovery in the US and hawkish comments from its central bank over the last 9 months, the US dollar has rallied strongly. Whereas over 20 central banks have cut interest rates since the start of 2015, the FED has only talked about raising them. The result has been a violent rally in the dollar.
Nevertheless let’s think like contrarions for a moment. If creating 295,000 jobs in February isn’t good enough for the FED, how would it react if only 100,000 jobs were created in March? If the US announced a few consecutive months of poor job numbers, I could see QE4 on the horizon. You have all already seen how Yellen’s dovish comments send the dollar index spiraling down last Wednesday. Now let’s take this another step. If Europe and emerging economies get the inflation that they are seeking, what will they do? They will raise interest rates aggressively to reduce the amount of money in circulation. They will be able to aggressively raise rates because these economies have far less debt compared to the US. The US can only “talk” about raising rates but can’t raise them due to its huge debt burden. So if this scenario played out, it would be the exact opposite to what is happening now. The FED would be loosening (QE4) whereas international countries would be tightening (hiking rates). What do you think this would do to the dollar? The dollar would fall hard and it would be extremely difficult to stop it falling
Many people don’t realize that Russia needed to increase its interest rate to 17% last year in order to save the ruble. When a currency is in freefall, this is the only option. The US can’t do this due to its enormous debt. Its caught in a bind. Yes the currency could be saved but it would be to the detriment of the economy.
To sum up I think it would be prudent for investors to exit dollar denominated investments going forward. The US is a very crowded trade at the moment and it usually is a bad sign when everyone is thinking the same way. If we get tightening from international central banks at the same time QE4 is announced, it would be disastrous for the dollar. A scenario like this would be the catalyst for a massive bull run in Gold. So watch for these 2 things which are ironically the opposite of what we have at the moment but very probable in the near term future
1. More easing from the FED (QE4 which would be probably bigger than QE1,2 & 3 combined)
2. Tightening from international central banks
Finally a point to consider. If the first rounds of quantitative easing in the US were the prime reasons for gold to go to $1900+ an ounce and silver to $49+ an ounce in 2011, what do you think QE4 would do? The minute you see the scenario above taking place will be the time to buy gold through SPDR Gold Trust (NYSEMKT:ETF) (NYSEARCA:GLD)