QE3 could de-rail global recovery, says McDonald
Hopes that the Federal Reserve will announce more quantitative easing next week are misplaced and the US and everyone else will benefit more from a stronger dollar, according to the Cazenove manager.
A decision by the Federal Reserve to print more money next week would be profoundly counterproductive, according to Cazenove’s Robin McDonald.
"If they go and print a huge amount of money in another swathe of QE this autumn – as many people expect they will – all that will happen is a short, sharp boom in commodity prices which will nip any nascent recovery in the bud," said McDonald, who co-manages the Cazenove multi-manager fund range.
"The risks associated with QE outweigh the returns, so I hope they don’t do it."
The manager thinks that the US Federal Reserve’s attempts to use monetary stimulus – forcing interest rates to remain at near zero after the technology crash in 2000 and printing money in two enormous batches of QE since the crash in 2008 – have failed to breathe life into the American economy.
He believes all this free money has ended up in the wrong place, pushing up asset prices, particularly those of commodities such as oil, but done nothing to resurrect the US consumer.
He points to the mining sector, which has underperformed consistently since the US dollar ceased to fall.
"The decline of the mining sector has coincided with an environment of the US dollar strengthening," he said. "While mining has declined other things have started to do relatively well – things like pharmaceuticals, where profits are usually in dollars."
According to data from FE Analytics
, the FTSE All Share Mining Index has underperformed the US dollar by more than 25 per cent over the last 12 months, during which time the currency has gained ground.
The 12 months prior to that show the FTSE All Share Mining index thrashing the dollar, returning more than 20 per cent while the currency lost 3.71 per cent.
Performance of indices over 1-yr
Source: FE Analytics
McDonald believes the Fed should have learned its lesson by now.
He explained: "Monetary stimulus by default is not very targeted. If you cut interest rates or print money you don’t know what part of the economy you’re going to stimulate. It has become clear that persistently debasing the US economy is not prudent."
The manager thinks the Fed may well want to fight shy of what the market is expecting, but could compromise because of pressure from the impending elections.
"It may be difficult to get an agreement between Republicans and Democrats over fiscal issues and if the Fed believes that there is a risk they may still choose to do something – what I hope is that this won’t be an outright balance sheet expansion, the kind of economic drug-taking that the market wants, printing another half a trillion dollars to buy mortgage bonds."
McDonald manages seven IMA portfolios at Cazenove, including the £876m Cazenove Multi-Manager Diversity
fund. He has returned 27.43 per cent over five years, compared with 26.43 per cent from his peer group composite.