Article / 25 May 2012 at 7:50 GMT

QE Alert! Central bankers realizing they are behind the curve

Steen Jakobsen Steen Jakobsen
Chief Economist & CIO / Saxo Bank

Monetary Policy is behind the curve
In the last few years, the Bernanke Fed has been very pro-active in introducing QE/Operation Twist any time equities sell-off deeply and confidence ebbs. Yet as late as yesterday, the über-doves like Bernanke and Dudley are all of a sudden rather bullish on the prospects for the economy.

One way to interpret their apparent change of heart is an overall concern not to rock the boat. By keeping the rhetoric low-key and hopeful, they try to move the debate away from any “panicky” response to things like the EU weakness the JP Morgan loss revelations. They also well understand by now that dovish rhetoric can aggravate commodity prices – so their very quietness might be seen as an attempt to support the economy as it massages commodity prices lower. And back in Q1, there may even have been an element of concern that any easing move could aggravate the scary gasoline price spike and uptick in overall inflation expectations. Any further rise in prices at that point would have drawn too much unwanted and unfavourable attention the Fed’s way. The problem now for the Fed is that the debt crisis in Europe is exploding and China is clearly slowing precipitously.

Being here in Asia, it is clear that the current account countries (Australia-India) are suffering from a lack of trade finance and credit. That’s because the 33% of funding normally done by the overseas branches of the major European banks has dried up as they are too busy slimming their balance sheets. So current account deficit countries, particularly India of late, have sharply weaker currencies and are seeing pressure on marginal rates and very little support for export credit and demand.

All macro policies are eventually proven as failures and I continue to believe that my headline “Extend-and-Pretend is becoming Pretend only” is appropriate. Time is running out, and all monetary policies are now behind the curve while structural reforms are still lacking. Developed and emerging market countries are all somewhere in the denial phase of a crisis (mostly the emerging markets) and protest/blame phase (developed markets). Soon we will be entering the mandate for change later in 2012 – not 2013 as the consensus believes, only because things are getting so bad that they can only improve.

Mining sector set to boom?
As the central banks discover that they are behind the curve and try to make amends, the usual suspects may be ready to rally on renewed monetary activism. Inspired by piece written by Mike Krieger - “The Big Print is Coming” - I created the chart below on the Gold Miner’s index. During my trip here in Asia I have been talking about wanting to go long the mining sector based on its 40 per cent drop and the increased likelihood of fiscal stimulus from China, which the State Council confirmed yesterday.



We are overdue a decade of good performance for stocks. Just look at the FT declaring that “the death of equities” on the front page yesterday – one of the classic signs that a major cyclical low is near.



I have three major premises I have learned from close to 30 years of trading and which have stood the test of time:

  1. Everything mean-reverts over time.
  2. Macro policies are always mistakes based on inevitably bad forecasting. The micro decisions – individuals and companies who can only survive if productive and making the right decisions, will always come out ahead eventually.
  3. Time is the one factor we can’t control and hence we need to build a portfolio and take risks while respecting this.

I will elaborate further on these premises in due course, but in my opinion those three premises explain why we are in a Pretend phase that will soon end – not in the seemingly interminable Extend-and-Pretend.
Slowly start building positions from here in GDX, HYG and GLD.


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