On November the 25th I published the following warning about the effects from
the Fed's imminent tapering of asset purchases:
"There is a good chance that the beginning of tapering will lead
to a reversal of the trade to sell gold ahead of the news. But the major
averages have priced in a sustainable recovery on the other side of QE, which
will not come to fruition. For the Dow, S&P 500 and NASDAQ the end of
QE will be especially painful. A unilateral removal of stimulus on the part
of the Fed will send the dollar soaring [especially against emerging market
currencies] and risk assets plunging -- you could throw in emerging market
equities and any other interest rate sensitive investment on planet earth."
The entire piece can be found here.
That prediction unfortunately came into fruition as the calendar turned the
page to 2014 and tapering of asset purchases began. The sad truth is that global
central banks have partaken in unprecedented intervention into the functionality
of markets and that has now set the stage for massive and destructive moves
in currencies and interest rates.
We are currently suffering through a huge correction in the equities of emerging
market economies. The threatened end of Fed stimulus has caused these currencies
to plummet against the dollar, taking their markets down for the ride.
But it's not just emerging markets that will feel the pain. I next predict
the unwinding of the colossal Yen carry trade in the near future. The Yen has
lost 25% of its value against the dollar in a little over one year. The Abe
regime has been successful in weakening the Yen against the Greenback, despite
the fact that it has withstood the assault of over a trillion dollar increase
in the size of the Fed's balance sheet in the past year alone. Yen weakness
is clear evidence that currency traders anticipate the imminent end of Fed
money printing and an increase in Treasury yields.
The investment world has poured into investments that short the Yen and go
long the Japanese stock market. Think about the Japan Hedged-Equity ETF (DXJ):
Investors have piled over $12.6 billion into this fund, which has soared 25%
in the past year.
Japan illustrates the current competition amongst central bankers to see who
has the best ability to destroy their currencies. However, the U.S. Federal
Reserve has kept interest rates at zero percent for over five years and has
monetized $3.3 trillion of debt during that same time frame.
Global central banks will soon learn a painful lesson that for every action
there is an equal and opposite reaction. The Fed's unilateral unwinding
of QE -- in the nation that owns the world's reserve currency -- is
an addiction extremely difficult to overcome. I expect massive disruptions
in equities, interest rates and currencies this year as the baneful consequences
of massive central bank manipulation of markets begins to manifest.
