After June, the Federal Reserve will end its latest money printing spree. This has been the cause of much speculation about what will happen in the financial markets. For example, Chris Martenson predicts a sizeable "correction" will take place by the end of October.
The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets — specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is.
Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.
You may recall that doomer Michael Ruppert believes we will all be hunting squirrels for food as the world falls apart beginning in July, which coincides with the end of QE2. And then there's the always levelheaded Graham Summers of Phoenix Capital, who wants to know why the Fed is freaking out.
... consider that during QE 1, the Fed was putting roughly $50 billion into the system. After QE 1 ended, the Fed’s monthly liquidity pumps fell to roughly $30 billion or less.
That’s when this happened:
So it’s not surprising the Fed freaked out and started QE lite in August.
This kept things chugging along until QE 2 was announced in November at which point the Fed began putting $100 billion into the market. And the Fed is now pumping $200 BILLION into the system.
Small wonder then that the US Dollar is falling off a cliff. Indeed, the way things are going, the Fed will push into a full-scale inflationary collapse within three months.
So if you’re not preparing for mega-inflation already, you need to start doing so NOW. The Fed WILL continue to pump money into the system 24/7 and it’s going to result in the death of the US Dollar.
On that note, there are only a handful of my Inflationary Storm PT 2 reports left. So if you want to get your hands on one, you NEED to order it now.
Martenson's prediction is not so catastrophic, but departs significantly from a Bloomberg poll of investors about what will happen.
Asked how financial markets will react when the Fed completes its purchases of Treasuries, 26 percent said 10-year yields will stay the same, and 17 percent said they will fall. Seventeen percent said the S&P index would gain, and 37 percent said it would stay the same. The U.S. Dollar Index is forecast to be unchanged by 26 percent, while another 26 percent foresee a drop.
Since the Fed approved the unprecedented $600 billion bond- buying program in November, yields on 10-year Treasuries have increased to 3.23 percent from 2.57 percent. The S&P 500 has gained 13 percent, while the dollar has weakened 1.7 percent against a basket of six currencies.
But these are the views of investors, or views that are targeted toward investors, like Martenson's. Forget about Wall Street. What will happen on Main Street when the Fed shuts the printing press down? And it is here that I see a glimmer—dare I say it?—of hope, or failing that, at least some temporary relief for ordinary Americans. Bloomberg says—
The U.S. unemployment rate dropped to 9 percent last month from 9.8 percent in November, and payroll growth topped 200,000 for three straight months for the first time in five years. Surging food and fuel prices boosted the year-on-year inflation rate to 2.7 percent on March, an increase Bernanke says will be temporary.
I doubt most Americans give a damn what happens to the S&P 500 or treasury bond yields, but a 10-20% "correction" to the downside in commodities would be a most welcome development. But what about jobs? Is QE2 responsible for the surge in hiring over the last 3 months? If so, withdrawing the monetary stimulus would not be a Good Thing. To influence the "real" economy, quantitative easing depends on a wealth-effect. In theory, when investors feel wealthier as a result of rising stock or bond prices, some of that wealth spills over into the "real" economy, where it is (ultimately) used to create jobs. In other words, quantitative easing is another version of Trickle-Down Economics.
While there is not a shred of evidence that QE2 is creating jobs, there is plenty of evidence, albeit indirect, that "excess liquidity" courtesy of the Fed has inflated food and energy prices. That's my story, as outlined in An Enemy Of The People, and I'm sticking to it. And that was before this latest round of phony oil price movements took the price from $113/barrel down to about $98. Given the demand destruction such prices have engendered, and throwing in the end of Fed money printing, we might hope to see a price in the $80-$90/barrel range, at least for the rest of this year.
Quoting Dave Rosenberg, John Mauldin tells us what happened the last time the Fed pulled back the quantitative easing throttle.
We have only one instance where the Fed cut back on quantitative easing, and that was last year. It is a data set of one, but it is all we have. So, let’s look at what happened. As noted by several sources (but I am looking at Rosie’s list right now), the Fed let its balance sheet contract by some 12% from late April to late August. Quoting:
“Now over that interval …
“The S&P 500 sagged from 1,217 to 1,064….
The S&P 600 small caps fell from 394 to 330….
The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary….
Baa spreads widened +56bps from 237bps to 296bps…
CRB futures dropped from 279 to 267….
Oil went from $84.30 a barrel to $75.20….
The VIX index jumped from 16.6 to 24.5….
The trade-weighted dollar index (major currencies) firmed to 76.5 from 75.5….
Gold was the commodity that bucked the trend as it acted as a refuge at a time of intensifying economic and financial uncertainty — to $1,235 an ounce from $1,140 and even with a more stable-to-strong U.S. dollar too….
The yield on the 10-year U.S. Treasury note plunged to 2.66% from 3.84%…”
There is a good chance the end of QE2 will be a non-event on Main Street, even if Wall Street gets hammered. But there is also a significant chance that the excessive pressure on your pocketbook will ease up.
Are you old enough to remember a time when the Main Street economy was the one and only economy, banks were utilities, the wizards of finance weren't considered geniuses because they aren't, and the world wasn't divided up into two increasingly separate parts, the Money World and everything else? Those times are only a distant memory now.
The days when the economy functioned on its own without extraordinary measures are long gone. Tear up the playbook. There are no rules anymore, it's a crap shoot. Who knows? Martenson and many others may be right about the inevitability of QE3, which the Fed may call the Completely Out Of Left Field Term (But Not Excessive) Liquidity Facility (the COLFTBNELF).
It's always interesting, and even entertaining in a dark kind of way, to watch the death throes of a once-great civilization.
"On that note, there are only a handful of my Inflationary Storm PT 2 reports left. So if you want to get your hands on one, you NEED to order it now."
LOL! :-D
Posted by: Loveandlight | 05/16/2011 at 11:26 AM