John Burbank of Passport Capital is predicting continued weakness for emerging markets and a slowdown domestically, which he believes will force the Federal Reserve to reverse course on its stance to start increasing interest rates. Previous rounds of QE (or quantitative easing) “had caused a misallocation of capital across the world” according to Burbank. “The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets,” he said. In the Financial Times interview, Burbank states the Fed may be forced to embark on another round of QE as slowing emerging market economies results in a spillover to lower growth for the US as well. “All of that turmoil around the world will come back and slow down capex and hiring and consumer buying in the US, and that will make the Fed realize they should be easing and not hiking,” he said.
In 2015, Burbank’s bets against emerging markets and commodities have paid off, with his two funds up 14.6% and 30.6%, respectively, through August.