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Hello QE4 (And The Damage It Brings)

by: Michael A. Gayed, CFA

The economy just went from a graceful swan to a sitting duck in a matter of a few months.

In September 2019, the Fed pumped dollars to resolve a liquidity crunch in the short-term lending markets and cut its rate by one-quarter point yielding to political pressure.

China-U.S. trade war impact and weak economic data subsequent to the September 2019 rate cut have opened the floodgates of another rate cut and QE.

Every time the Fed implements 'quantitative easing,' a.k.a. printing more money, two things go up: taxes and inflation. When taxes and inflation go up, more jobs are lost. - Robert Kiyosaki

The economy just went from a graceful swan to a sitting duck in a matter of a few months. In September 2019, the Fed pumped dollars to resolve a liquidity crunch in the short-term lending markets and cut its rate by one-quarter point yielding to political pressure and mixed signals from economic data.

The haze enveloping the China-U.S. trade war, a brand new potential trade conflict with Europe, a 6.3% month-on-month drop in the services index, slowing spending, and a weakening of consumer confidence, 136,000 jobs added v/s 145,000 expected with a drop in average wages, political uncertainty - these subsequent events have opened the floodgates for another rate cut and perhaps some form of Q.E. (Quantitative Easing) in the Fed's Oct. 29-30 meeting.

Of course, the Fed won't call it Q.E., but give it some other name such as "organic growth." Whatever they may call it, the bottom line is that it involves the Fed creating money to buy bonds and increase liquidity of commercial banks so that they can lend freely and stimulate the economy.

Whereas cutting rates by a few points is like playing with an adorable and friendly pup, a rate cut combined with Q.E. can be like provoking a lunatic pit bull. Chances of damage are high, and here is why:

1. Though Americans love debt and spending, at least 60% live paycheck-to-paycheck, and many struggle with their existing debt repayments. Wage growth is slowing, profits are dropping, and the chance of recession is increasing. In this state of flux, folks may prefer curbing expenses, saving up, and repaying existing debt. Therefore, a rate cut and excess liquidity in an era of contracting demand may not help.

2. Though it seems that the U.S.-China trade war will prolong, there is always the possibility of a limited trade deal, which may happen depending on which side blinks first. If it does happen, the Fed may regret cutting rates in a hurry.

3. A large influx of money into commercial banks can cause a surge in risky lending. Just like it happened in 2008. Discipline will be trashed, the fiscal deficit will pile up, and the Debt-to-GDP ratio will spike some more - it already is at 106%. This implies that U.S. will spend more than it earns.

4. Fed cut and Q.E. will reduce the dollar's value and make exports cheaper. However, there is demand contraction in many countries. Germany and U.K. (with Brexit) seem headed for economic trouble. China's economy is already hurting. Therefore, a fallen dollar may not help exports.

5. Excess money supply will raise commodity prices while falling rates will punish savers. Demand can fall instead of rising, and the Fed may be sucked into a deeper mess.

6. Here's the clincher: The Fed's earlier Q.E. 2 and Q.E. 3 haven't really helped growth over the years. Q.E. 1 worked because 2008 was an extraordinary event that needed easing. We are not facing such a situation in 2019.

Q.E. is going to be a hazy, mirage-type experience with many ifs and buts waiting to wreck the party. However, a gush of liquidity, coupled with extremely low interest rates, will motivate global investors to park their funds in emerging markets.

Emerging Market ETFs are already being chased by global investors.

(A) On Oct 2., when the Dow fell 1.86%, the iShares MSCI Emerging Markets ETF (EEM) bounced back from its lows to close flat, and then broke out of its trendline on Oct. 3, and headed higher.

(B) The Vanguard FTSE Emerging Markets ETF (VWO) also rose and is hovering near its 20-day EMA and trendline resistance, and looks all set to break out.


Though Q.E. always throws up many money-making opportunities that must be exploited. Savers hit by low rates and investors must move out of losers and laggards and park their funds in assets that have the potential to deliver exponential gains in a new potential Q.E. era.

That said, Q.E. (call it organic growth if you want) is still not announced, and chances are high that it will be, along with a rate cut, in the Oct. 29-30 Fed meeting.

Be prepared.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.