In 2016, the Fed is trying to raise interest rates. The US economy is actually starting to decelerate, but the Core CPI (excluding food and enegies) is edging higher. If this uptrend is long-term, the Fed might be forced to rush for rate hikes undesirably.
Will that happen? Is the US economy going into stagnation? In this article we argue the outlook of inflation in the US and its influence on rate hikes, the stock markets and the gold price.
Did Abenomics successfully save Japan from deflation? Not really. Will quantitative easing and negative interest rates by the Bank of Japan (BoJ) make it better in the future? Not very likely.
The BoJ is no longer controlling the monetary policy of the Japanese economy. The central bank has already taken all the effective options, and thus the room for expansion of easing is quite limited. There is something that decides the monetary policy instead of the central bank.
This is somewhat old information but surely illustrates what Japan thinks of quantitative easing. The following is a video of the Japanese financial minister Taro Aso in 2010 explaining why Japan’s huge public debt is not a problem:
In this video, Mr Aso asserts that Japan will not go bankrupt despite the huge public debt because debt monetization will clear all of it. This was when the Liberal Democratic Party was not ruling the parliament, and thus he was perhaps more frank to talk about what he actually thinks of the debt.
The global deflation and low economic growth are the keys to investment in 2016. The weak demand from the decelerating Chinese economy has pushed down the commodity prices, and Europe and Japan are still struggling to recover from the recession.
The advanced economies have already relied on the quantitative easing, and if even the QE cannot revive the economies, what would be the cause of such a strong deflationary force? Larry Summers, the former Treasury Secretary, called it secular stagnation.
Japan’s GDP data for the 4th quarter of 2015 was published, revealing that the real GDP grew 0.66% (year-on-year), slowing down from 1.65% for the previous quarter.
The chart obviously shows the consumption tax hike in Apr, 2014 ruined the uptrend after Abenomics. We will review the elements of the GDP, which indicate more about what is actually happening in the Japanese economy.
The US economy only grew 1.80% (year-on-year) in the 4th quarter of 2015, slowing down from 2.15% in the 3rd quarter, according to the real GDP data. Regarding its elements, the personal consumption, the fixed investment, the exports and the imports decelerated respectively.
As you see in the chart, the worst element is the exports. It is also notable that the personal consumption did not accelerate despite the radical decline in energy prices.
The US stock market still remains at around the all-time high after the Fed started raising rates, and that is because investors believe, rationally or not, that the strong US economy will keep equity appreciated even without the support of the Fed. However, the US economy will slowdown, and then the stock market will lose its last resort.
We have insisted the easy market fuelled by the QE is already over, and the stock market will face difficulties and uncertainties. The following three remarks conclude our general forecast for the US stock market:
The upside is limited due to rate hikes and the strong dollar
A sudden plunge can always happen, presumably by 10-30%
It still take a while till the total collapse of the QE bubble
In such a situation, mere buying or selling cannot be profitable. Both of short selling and the long-short strategy have some flaws. Then what can we do? After long contemplation, our conclusion is as below.
The easy market for investors supported by the Fed’s quantitative easing is already over, and now the question is merely when, not if, the asset bubble bursts in several markets. The assets in a bubble are stocks, bonds and the dollar.
The Fed has ended its QE programme and is now in a process of raising interest rates. Will the US stock market be okay? It can never be okay as the central bank has injected trillions of money and is now going to retrieve it, but the market is manifesting groundless optimism.
The greatest premise investors believe in is the strong US economy and thus the strong dollar. However, the time is near for the uptrend of the dollar to be fading out. Why, how, and when? We will explain it in this article.
On the 3rd of December, the ECB (European Central Bank) decided to cut interest rates and extend its quantitative easing. The deposit rate was lowered from -0.20% to -0.30%, and it was declared that the central bank would maintain the QE until March of 2017, postponed from September of 2016.
As Dr Mario Dragi, the governor of the ECB, had suggested further easing in advance, some investors were expecting the expansion of the QE, which was not decided this time. Consequently, EUR/USD sharply rebounded.