The Federal Reserve will return to pumping more money into the global financial system as the world economy stalls and emerging-market stocks plunge, says John Burbank, founder of Passport Capital Llc.
"We are on the precipice of a liquidation in emerging markets like the fourth quarter of 1997," he says in an interview
with RealVisionTV. “The Fed would eventually be forced into a fourth round of quantitative easing to shore up the economy."
In 1997, emerging markets in Asia were forced to devalue their currencies as they ran out of foreign reserves to support exchange rates. The contagion spread to U.S. markets with the Dow Jones Industrial Average falling 7.2 percent in a single day. Eventually, the International Monetary Fund bailed out countries including Thailand, South Korea and Indonesia.
Burbank, who oversees $4.1 billion at San Francisco-based Passport, says global markets are showing similar signs of instability.
"Nothing's safe. The liquidity of everything is being taken down," he says. "The market is now going to discover just how much liquidity is actually in the market."
The Fed has held rates near zero percent since December 2008 when the U.S. economy declined the most since the Great Depression. The following period of weak growth pushed the central bank into several rounds of “quantitative easing,” or buying bonds on the open market to pump more cash into the banking system.
Lower interest rates make it cheaper to borrow, which can help to boost spending and investment.
The Fed on Sept. 17 decided to hold rates near zero, sending the S&P 500 down as much as 5 percent, a possible indication that the central bank had lost credibility among investors. Its statement cited concerns about “recent global economic and developments” — without mentioning China’s stock market crash and slowing growth — which added more layers of complexity for analysts to fathom.
In a speech on Thursday, Fed Chair Janet Yellen said the central bank is on course to raise interest rates later this year.
Burbank says the Fed wants to get back to normal policy after experimenting with quantitative easing.
“I think they realize the more they do this, the more they can't get out of it, and the more they pervert markets... and I believe they want to get out of it," he says. “What the Fed learned was that their models don't work. They didn't have the GDP/economic effect.”
A coming economic decline may push the Federal Reserve to set interest rates below zero — that is, banks would be charged for holding cash at the central bank — in a frantic attempt to revive growth.
That’s the latest prognosis from Albert Edwards, global strategist at Societe Generale, who said he and fellow market bear Bob Janjuah, a senior adviser at Nomura Securities, recently mused over the possibility of rates bottoming at -5 percent.
That would mean replacing zero interest rate policy, or ZIRP, with negative interest rate policy, NIRP.
“The next U.S. recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed,” Alberts says in a Sept. 24 report
obtained by Newsmax Finance. “It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the U.S.”
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