All aboard the QE train?

'Everybody's looking for safe havens. Everybody's looking for yield. Everybody's lookin', but nobody's thinking'  Russel newsletter, Oct. 5th 2010.

Let's start with some thinking then: If this "game" continues where do we end?

The QE2-train has left the station fully booked, fully loaded........What does it do for job creation in the US? 

Nothing! It boost the banking sector, it makes speculators rich, but it does not create more jobs as the low rates and asset buying benefits the already rich risk takers of the financial markets. Meanwhile in Corporate America - they look at the world through optics of demographics and growth and fairly easily reach the conclusion: The future is in Asia and Latin America.  Lets move our business closer to the customers - particulary now that funding for projects and debt expansion is EXTREMEY CHEAP - well done - the US FED is effectively removing jobs from the US now adding through theirQE (which if you look closely was also the result of QE1)


Secondly, if the outflow continues - (and it's really the globalisation issue we are discussing) all of the world savings/investments will be in Asia and part of Middle East. US and Europe will be holiday destinations at best!   Europe could be Disney-land - it's in to rename Sports Stadiums why not whole geograhic areas? This can not simply continue as they system goes bust.


Thirdly, now add the race to bottom currencies devaluations and we have entered a time with increased protectionsnism - Three of the world four biggest GDP's are now fully engaged in weakning their currency: China through peg, US through QE Japan through intervention/QE only Europe stands out - and what Europe needs right now with wide sovereigns debt spreads is a strong EURO not! 


I'm somewhat surprised at the lack of rhetoric from Europe on FX so far, I can only see it as a "deal" not to talk ahead of this week IMF meeting and G-20 Financeminster meeting next week chaired by France - the ultimate country of intervention and short-term political solutions. Europe seems to want to able to hold their heads high leading the G-20, but in doing so they, as always, stand out as being the scapegoat of the FX markets.

EUR has been caught in the middle of the globalisation game for a long time - US pursuing weak US Dollar policy through printing of money and China/Asia artificially making their currencies weaker, which has meant and means slow export from Europe (except for German cars to China)........


We discussed at length the end-game in our weekly investmeeting this Tuesday morning and we got as far as to define following conceptual rule:

1.  It's all about creating jobs. This is on the agenda in the US and China. Fed Chicago calls fall in unemployment unacceptable(too slow falling) and China has changed their policy mix to focus on domestic consumption (the share of consumption to GDP has fallen from 45% to 35% in the last ten years) - this can only be done by creating more jobs which for an Plan economy is also both the social and economic reality.
2. To create jobs you need at least 2.5% growth if not 3.0% - this is big task for a very deleveraged US consumer economy. Well, yes financial US is doing fine, yes, corporates have best balance sheet ever - thanks to low rates for too long, but the US consumer (70% of GDP) is still in the process of adjustment(http://twitpic.com/2v2lf1). They are showing Ricardo behavouir looking for increased tax and less disposable income. Several US states need/should ask for bail-out inside the next 12 month according to Meredith Whitney's latest report. 

So - all actions by centralbanks and politicians should be seen through this objective: We need to create jobs to keep our jobs, to stop social tension rising, and to maintain the illusion of things will be ok -  in the process the dynamics of QE escalates the imbalances of financial flow, increases need to devalue currencies, and the response is always the same: More printing of money, low rates forever.....

Was it Einstein who said: "If you keep doing the same experiment expecting a different result you are an idiot" . QE2 and the whole thinking that low rates can safe the world is the real world equivalent of a experiment. The last two weeks comments and speeches from central banker CLEARLY shows they are lost - totally lost - unfortunately the price to be paid is serious unwinding of the supposed FREE NO RISK GUARANTEED ride on stocks, gold, and everthing floating.


This fund manager will NOT fight the move to 1250-ish in S&P or 1350/1400 in Gold, but will not join either - when lost (like I was in 2007 and 2000) understanding the markets, the time is for CASH - Zero percent return could soon be attractive again...


STRATEGY:


My allocation model is long EVERYTHING - it is reducing long GOLD (weighting increased too much) back to norm allocation of 10% - otherwise long fixed income (50 pc), Emerging markets (fully loaded @ 20 pc) and none EMG-equity(fully loaded @ 15pc), Commodities (5%)..........so model says RISK ON - the risk overlay manager - me - says hang on.......there is too much divergence here....... classic fight - the odds on scenario is that we have free ride in to QE "official announcement" on Nov 3rd........


Whatever happens - keep it light, flexible, good luck...


Winston