It has been a little over a month since the Fed announced QE3; investors are already looking for an expansion to the program. It’s becoming clear that monetary easing has lost much of its effectiveness. Could we soon witness the popping of the moral hazard bubble, as investors realize that the Fed doesn’t always win?
Caution is warranted. The parallels between the U.S. and Japan are uncanny.
Food Prices Jump to Six-Month High as Dairy Costs Rise - Bloomberg
World food prices rose in September to the highest in six months as dairy and meat producers passed on higher feed costs to consumers, the United Nations’ Food & Agriculture Organization said.
An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.
Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. Higher prices don’t mean a food crisis is imminent, he said today by phone.
“Despite a very difficult market, the fundamentals that suggest a food crisis are just not there,” Abbassian said. “Market sentiment is now accepting high prices more as a rule than as an exception.” — Bloomberg
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Sure it’s not a food crisis, for those who can afford higher prices.
Fed Recovery Doubts Spur Investor Bid for Treasuries - Bloomberg
In the past, Treasuries would have a prolonged period of selling after a QE announcement. Not this time around. Growth concerns have quickly come to the fore again, despite pledges of open-ended QE. This is a red flag for equity investors in my view. It’s a sign that investors are clearly losing faith in the Fed engineering a recovery via monetary easing.
As always, it’s prudent to pay attention to the technicals for signs of a weakening of the current rally. It feels like sentiment is turning bearish. I’d be snatching profits from the strong run up since the June lows.
Asia Ex-Japan Stocks Swing Between Gains, Losses on QE3 - Bloomberg
“We think Fed’s action could aversely impact China’s bias to ease, at the margin,” Citigroup Global Markets Asia-Pacific Chief Economist Johanna Chua wrote in a report dated today. “We think this has marginally reduced the odds of easing for a number of countries largely due to rising inflation expectations, especially among central banks that have been somewhat neutral to hawkish.”
China’s former banking chief called the Fed’s third round of quantitative easing “irresponsible,” while an official at the regulator said the stimulus won’t provide sustained support to the U.S. economy.
“It’s irresponsible to the U.S., and also irresponsible to us,” Liu Mingkang, former chairman of the China Banking Regulatory Commission, told Bloomberg News at a conference in Beijing on Sept. 15. He declined to elaborate. The measures are more likely to boost growth “for a period” of time than provide longer-term support, Yan Qingmin, assistant chairman of the CBRC, said Sept. 15. — Bloomberg
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And thus begins the unintended consequences.
Is the U.S. using QE as an economic/military weapon to keep China’s restlessness in the South China Sea under control? The more money the Fed prints, the higher inflation expectations become, which could result in instability in the communist nation due to stagflation.
Stocks rally as Fed signals another round -- Marketwatch.com
I wrote good deal about my thoughts on this…but for some reason the computer did not post them. I don’t have time to rewrite them….instead I’ll include a link of an article I wrote a while back and that continues to be an increasing risk to the long-term direction of the global economy.
Eitherway, it’s a bullish short-term catalyst and I’ll be increasing positions in commodities and precious metals in the coming days….though I’m not jumping in with both feet. The global economy remains built on faulty foundations.
Fed Seen Starting QE3 While Extending Rate Pledge to 2015 - Bloomberg
The Federal Reserve is likely to announce a third round of bond purchases tomorrow, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015. — Bloomberg
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If it’s in the news, it likely priced in. If Bernanke disappoints, the S&P 500 may fill, to the downside, the upside gap created from Draghi’s pledge to print Euros (Outright Monetary Transaction).
It seems that markets are heavy at this point. How much more can central banks juice markets higher, especially when economic data has been lackluster? Some of my shorts were covered in the spike higher over the past couple of days, but I’m not keen on increasing upside exposure just yet.
In 2010, the last time the Fed launched a bond-buying spree in an attempt to boost the flagging U.S. economy, many of the hundreds of billions in excess dollars went in search of better-paying returns in other currencies. This prompted an international backlash against the U.S. while foreign governments tried various tricks to anchor their ascending currencies and restore their exporters’ lost competitiveness. Brazilian Finance Minister Guido Mantega characterized it as a “currency war.”
Bernanke responded to his foreign critics by declaring that the dollar’s weakness was a byproduct, not the intent, of Fed policy. Interventionist central banks should stop meddling with their currencies and instead worry about domestic inflation, he would say. That was all very well in theory, but developing countries weren’t buying it. Here they were, earnestly pursuing U.S.-recommended free-market policies, and now it seemed the Fed itself was deliberately flooding the world with dollars to lower the greenback’s value. They felt they had no choice but to fight back. (via QE3 and the looming currency war - Michael Casey’s FX Horizons - MarketWatch)
Could partially explain continued weakness in consumer confidence. Supply side shocks, coupled with expectations of monetary stimulus are sending gas prices to dangerous levels.
Get ready for QE3 - MarketWatch First Take - MarketWatch
QE3 at this point would be a policy error. It’s clear that the prior two programs have failed to create sustainable growth. Nevertheless, markets have been pricing in an increasing likelihood of such an event. The Fed may be boxing itself in on the promise to deliver monetary easing.
If they choose not to do so in the upcoming Sept. meeting, which ironically coincides with the German Constitutional Court’s decision on the ESM, liquidity starved equity investors may throw fits and send markets lower.
Why would the Fed do QE3 if oil prices are elevated and food prices are moving higher due to supply side shocks? The more funny money is released, the more pressure savers and the lower class would be subject to. And for what? To keep the status quo and not allow capitalism to work and punish investors who made bad bets?
It’s time to read my blog’s motto: “Common sense, why don’t our leaders have any?”
Commodities Begin Bull Market Amid U.S. Drought - Bloomberg
Governments’ dependence on debt monetization (central bank printing) as a tool to fight general weak economic growth will also act as a long-term tailwind for commodities (particularly food-based).
Food prices remain high and funny money is flowing. If China were to unleash another powerful stimulus similar to 2008/2009, rising food prices would weaken the communist party’s power.
To be sure, China is stimulating, but they have much less political will to do so this time. Recognition delay is much longer than before as lawmakers feel the effects of this chart.
Fascinating Fed Charts, 1915-2012
Via LvMI, more interactive charts here: assets and liabilities.
Fed's Dudley: Upward pressure on inflation fading - MarketWatch
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).
More ECB unconventional easing may be needed: IMF - MarketWatch
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.
