The zero-sum (at best) character of Quantitative Easing (QE), especially Japanese or European QE, is staring us in the face of the rout Global Equities are experiencing. The Dow is back at its 2013 levels (the Dow Jones Industrials closed below 16,000 today) while emerging markets, especially countries that rely on exports, are reeling from fleeing liquidity. China, because of the resulting export and growth slowdown, is left with only one viable option which is to join Japan and Europe in a de-facto competitive devaluation of its currency.
So does this signal the end of the 6 year global equities rally and mark the beginning of a new economic ice age? Or is this a normal correction with a return to the “new normal” of QE driven asset inflation and sluggish but steady economic growth?
Our baseline picture at The Absolute Return, which is built on our global macro informed, inter-market correlated fractal models, has been anticipating this weakness and suggests that there is no need to panic but to carefully understand the economic shifts taking place and re-align investments over the coming months with a new and very different phase of the economic recovery from 2009.
- The upheaval is the sign of a significant shift that is starting to take shape in response to the deflationary impact of global quantitative easing on Emerging Markets. China is no longer a passive victim of quantitative easing policies in the US, Japan, and Europe, but has begun an unprecedented liquidity drive that has already untethered the Yuan from the USD and, we believe, should ultimately reverse this emerging market deflation. The sign that this is happening would be a top and a reversal in the US Dollar, but that top could take many more months to form.
- Practically, this could mean a floor for the Dow in the 15,000 range with sideways looking price action into 2016. But a repeat of 2008 appears to be unlikely.
- US and developed world economic growth should stall during this period of sideways equity market prices.
- Any pickup from current levels would be inflationary in the US and in most Emerging Markets, a very significant change from the nature of economic growth we have seen since 2011.
- The current market rout and the sideways market of the coming months could provide some exceptional medium-term buying opportunities in many categories of investments that have performed poorly in the QE driven, dis-inflationary economy of the past few years.