Slowly but surely, the stage is being set for another QE should the economy weaken further.  Just keep an eye on those 5 and 10-yr breakevens for the trigger, they’re still too high (sub 1.6 and 2 respectively should scare FOMC enough to respond the only way they know how… Ctrl +P).

Let the drug-begging begin. As I wrote in this post, the more government officials resort to monetary easing, the more long-term damage they create to the global monetary system.  Inflation would begin to rear its ugly head worldwide.  

Here’s the other side of the argument and one that I agree with if Europe can sort through its issues.  If the global economy keeps growing and the Eurozone issues are taken care of, stagflation will be the result.  Also attempts to weaken currencies by all global players to induce exports will only set the stage for beggar thy neighbor policies, potentially ending in high inflation over the long-term.  

Amen Peter.

“They’re definitely frustrated and disappointed,” said Stephen Stanley, chief economist at Pierpont Securities LLC and a former Federal Reserve Bank of Richmond researcher. “I’m sure they would have anticipated they would have gotten more bang for their buck.”

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So why are you trying it again?  Are you expecting different results Bernanke?  Isn’t that the definition of insanity?  Worse, high tension in the Middle East has oil itching to move higher.  Further talk of QE could be the match that lights the fuse for a move to $110-$120.  

Next week will be interesting due to inflation data slated for release on Wednesday (PPI) and Thursday (CPI).

what caught my eye was the inflation forecasts.  How is the ECB suppose to resort to monetization when inflation forecasts are moving higher?  Inflation is already high in Germany, which is a major reason why I am skeptical of the ECB going ahead with QE.  

This also brings me to the point that continued printing of money will lead to higher and higher prices of commodity products until you have consistently high inflation along with lower or uneven economic output.  I speculated this dynamic back in….Sept. 2010.

If this communication strategy passes, it, along with the army of doves ready to take control of FOMC slots in 2012, could result in stagflationary conditions sometime in 2012-2013.  

When will Mr. Evans shut his trap?

Considering that the Fed had a lot to do with our current 10 yr secular bear market:

• —by blowing bubbles in internet stocks, then not allowing capitalism to work by flooring rates and stemming an ongoing recession in 2002, thus culminating in a housing bubble of epic proportions—… 

…you would figure they would be a little more “muted” about “taking more chances”.

The Fed is extremely important in financial markets (so far…).  I don’t think the mentality of “lets take some chances” belongs in such an important institution.  That’s for day-traders, not for the establishment that manages interest rates of the global reserve currency.  Policy makers could learn a thing or two from Germany.   

Evans makes me shudder in fear.  

The oil markets love it though and frankly my views on continued myopic Fed policy don’t matter.  What does is preparing for what may come.  Commodities and precious metals would be asset classes that benefit from such policy actions.

Aside from Mr. Mauldin giving us a fantastic summary of what’s going on in Europe, he gives us this little snippet, which particularly caught my eye.

• “As a closing aside, a lower euro means lower US and emerging-market exports (Europe is China’s biggest customer!) to Europe and more competition from Europeans in what the rest of the world sells to each other. It will be the beginning of serious trade issues and when coupled with the collapse of the Japanese yen, circa 2013, will usher in currency wars and protectionism. This will be a decade we will be glad to leave in 2020.”

It makes perfect sense should we go the way of the ECB printing press.  In the short term, though, if the ECB began to print, we would more than likely challenge the bull market highs.  However, an environment of increasing trade tensions (ie Currency Wars) and stagflation would be in store if I were to speculate the medium-term consequences.  

This is a secular trend, which will have indelible effects on many macro factors.  

For starters it would mean an more pronounced recovery in the U.S vs. the one we’ve experienced since mid-2009.  However, because of our Fed’s myopic strategy of continuous QE, inflation will become a more persistent problem.  Furthermore a steady source of this inflation (the rise of China) will probably result in the top for the Treasury bull market that has been in place for the past 3 decades.  

While these events aren’t knocking at the door (I see some more upside for Treasuries and continued disinflationary pressures in 2012), the genesis of these profound long-term trends are in their infancy and will continue to grow.  I’m thinking they will become more observable in 2013-2015.  

I’ll be including these thoughts in my next outlook (Beg.-Year 2012)