Thursday, January 22, 2015

QE4

Many analysts are going to be surprised this year or early next year when the Fed announces QE4.
All the previous inflationary policies did not work, as predicted. If it fails, try the same thing again. And that is what the Fed is going to do. But for now, the market believes that QE3 worked. They will be in for a shock.
When that happens, will China do a Switzerland? Or continue to bleed their citizen's wealth propping up the dollar?

In the past few years, analysts say that if China were to dump the dollar, they will lose big time, so they have no choice but to keep buying US bonds. Well, the former is somewhat true, but the latter is false. Sure, they will lose out on their existing holdings. They made a bad bet. And they know it. It is probably done to gain political influence and friendship, although the citizens have to foot the bill. But will they go on buying US debt indefinitely? Not in my opinion. They may lose money if they stop buying, but they will lose even more money if they continue buying. So which is better? In the past 22 months, their treasury holdings have already tapered off and started dropping. Whether this will continue to be a trend remains to be seen.

With China out of the picture for now, Japan the Fed, and, mysteriously, Belgium, have been soaking up all these US bonds. No one can predict how long this will go on. But pretty soon these bond holders have to start cutting their losses. Treasuries have had over 30 years of bull run. It had a 30-year bear run before that. The next 5 years will be truly exhilarating in the financial markets. But my thoughts are with the hundreds of millions or billions of innocent citizens across the globe who have been footing and will continue to foot the bill.
 
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