Is It Time To Prepare For QE 4?

Lawrence Peter once defined an economist as “an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

Considering the forecasting track record of economists, we can probably agree that’s a fair definition.

For example, about a year ago, economists from Wall Street’s biggest banks forecasted that the Federal Reserve would raise interest rates by June 2015.1 We all know that hasn’t happened. These were economists from the banks that deal directly with the Fed – and they were totally wrong.

Most of the Fed economists were also forecasting a rate hike this year. In December 2014, the Fed started signaling a rate hike was close. And, Janet Yellen, the Fed’s chairwoman, declared: “Employment is rising at a healthy rate and the U.S. economy is strengthening.”2

Despite the optimism from economists, the U.S. economy has actually weakened recently. And now, another round of Quantitative Easing or QE (a.k.a. money printing) is beginning to look like a possibility.

Let’s take a look at the two main reasons why a rate hike is unlikely this year.

Reason #1: Strong U.S. Dollar May Trigger Crisis In Emerging Markets
Despite a recent correction in the U.S. dollar, it remains relatively strong. And that’s creating a lot of problems around the world, especially in emerging markets.

You see, a lot of companies in those countries simply hold too much debt denominated in U.S. dollars. According to The Wall Street Journal, the amount of loans made in U.S. dollars to emerging-market borrowers has almost doubled since 2009.”3

Most emerging market currencies have lost a lot of value against the dollar the last few years. J.P. Morgan’s emerging market currency index, which measures the most heavily traded EM currencies against the dollar, is down 8.5% this year.4

As a result, some of these companies are having trouble paying back those loans. Bloomberg reports that there have already been more global corporate defaults this year than in all of 2014.5

But it’s not just emerging market defaults. The strong dollar is also hurting global trade. Most emerging markets still buy a lot of their imports in U.S. dollars. The strength of the greenback has essentially increased the cost of the goods they import. As a result, global trade appears to be grinding to a halt.6

The bottom line is that if this dollar strength persists, things could continue to get worse in emerging markets. And, the weakness in the global economy could end up hurting our economy. In fact, it’s already happening.

Reason #2: The U.S. Economy Is Weaker Than Expected
There are signs this slump in world trade and slowdown in emerging markets are already taking their toll on the U.S. economy. The latest economic data in the U.S. has been weaker than expected.

The U.S. Department of Labor, for example, recently reported that U.S. businesses created only 142,000 jobs in September 2015. That’s about 64,000 fewer jobs than expected. There was also zero wage growth. And, thousands of workers quit the labor market, taking the participation rate back to levels last seen in the 1970s.7

With these new signs of weakness, it’s very unlikely the Fed will hike rates anytime soon. Wall Street Journal reporter Jon Hilsenrath is thought to have deep connections inside the Federal Reserve. So, when he writes, everyone listens. Here’s what he wrote recently:

“The chances of a Federal Reserve interest-rate increase in 2015 are diminishing amid new signs of anemic economic activity, a disappointing development for central bank officials who have been hoping to move this year after a prolonged period of easy-money policies.

“Lackluster readings on consumer spending, inflation and jobs have virtually eliminated the chances of a move this month. Already, two Fed governors expressed doubts this week about whether the timing will be right this year, and the recent trove of data hasn’t reassured top officials about the economic outlook.”8

Should We Get Ready For QE 4?
Interest rates are already at zero. If the economy keeps weakening, the only way out for the Fed will be a return to QE. In fact, a lot of analysts are already saying the Fed could soon crank up the printing presses again.

Jerome Booth, former head of research at asset management company Ashmore Group, recently predicted that the Fed will launch QE 4. “What we have had is a jobless recovery in the U.S. and so the Fed could not afford to cause another depression by raising interest rates. QE 4 will be their next move, which is now much more likely than a rate hike,” says Mr. Booth.9

So keep an eye on the economic data. The weakness in the global economy could end up forcing the Fed to launch another round of QE. If that happens, it should create great investment opportunities, especially in commodities. This could be just the beginning of a major recovery if the Fed decides to crank up the printing presses once again.

Until the next Daily Pfennig® edition…

Mike Meyer
Vice President
EverBank World Markets, a division of EverBank