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Shortly after you receive this issue of Money and Markets, Federal Reserve Board Chairman Ben Bernanke will give his landmark speech. The 10 a.m. EST address at the Kansas City Fed’s Economic Symposium in Jackson Hole, Wyoming is titled “Near- and Long-Term Prospects for the U.S. Economy.”
I can’t recall a Fed speech so highly anticipated on Wall Street …
Wall Street is practically salivating at the prospect that Bernanke will fire up the printing presses again. After all, it was his comment a year ago that “the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary” at the 2010 Wyoming gathering that presaged the launch of QE2!
But here’s the cold, hard reality you’re not hearing on CNBC or reading in The Wall Street Journal: The Fed simply can NOT launch QE3. The political and economic pressures on Bernanke are too great. And even if Bernanke tried to defy every opponent, as well as economic logic, and pledged to print more money, I believe the impact on the market would last no more than a few days, if that.
Here’s why …
Political, Internal Dissent Is Too
Great for Bernanke to Buck …
Several days ago, Republican presidential candidate and Texas Governor Rick Perry lashed out at the Fed in a way you seldom see. He flew into an aggressive attack on money printing, and said Bernanke would be “treasonous” if he launched another round of his monetary madness.
Now I’m not going to get into a debate about whether his language is too heated or not. But Perry is hardly alone in criticizing the Fed — and those critics are getting more and more TV time. Just look at Ron Paul, a leading candidate who has made it clear he wants to abolish the Fed altogether. Even your traditional, so-called “mainstream” Congressmen are fed up with the Fed.
Then there’s the internal debate at the Fed itself!
At the August 9 policy meeting a whopping three voters dissented with the decision to pledge to keep rates low through mid-2013. They included Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota. That’s the most internal dissent we’ve seen in a Fed policy vote since 1992 — 19 years ago!
… And QE2 Proved to Be
an Abject failure!
Maybe Bernanke could find some way out of the political box he’s in if there were any evidence QE actually worked. But it doesn’t! We now have real, incontrovertible evidence that all QE2 managed to do was inflate asset prices — while doing jack squat for the “real” economy and the market it was most supposed to help, housing!
If it were just stock prices that inflated, that might be one thing. But it wasn’t. QE2 also goosed commodity prices, driving up the cost of Main Street America’s gas and groceries. So officials both inside and outside the Fed are coming to an inescapable conclusion: You can’t just keep shafting 98 percent of America so a few Wall Street bankers can buy themselves an extra Ferrari or two!
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| QE2 disappointed stock investors. |
Heck, even the stock market gains didn’t last. We gave up every Dow point we gained from QE2 — over the span of 10 months — in just a couple weeks!
Bottom Line: Get Ready for a
New Market Plunge!
So what if I’m wrong? What if Bernanke comes out and tries to pull another QE rabbit out of his hat? I would tell you to think about the law of diminishing returns.
QE2 had less of an impact than QE1. QE3 would have an even smaller impact because everyone in the world knows that QE ultimately doesn’t work. I’m talking about nothing more than a few hundred Dow points … and a complete rollover within days, or hours, after that.
There’s an even MORE powerful reason to expect a plunge after any post-speech rally: The economic collapse we’re seeing now is much deeper and more powerful than the one in 2010 …
==> The Philadelphia Fed index just registered -30.7, the lowest since March 2009 …
==> The Richmond Fed index just tanked to -10, the lowest since June 2009 …
==> New home sales just fell for the third month in a row, while purchase mortgage application volume plunged to the lowest since December 1996 …
==> And the University of Michigan’s consumer confidence index imploded to 54.9 in August. That is the lowest level since May 1980!
It boils down to this:
If Wall Street is hitching its wagon to Ben Bernanke’s QE3 horse, they’re going to get taken out back and shot. QE3 isn’t coming. And even if we get some kind of QE-lite, reorganization of the Fed’s balance sheet, reduction in the interest rate the Fed pays banks to keep money on reserve, or whatever, it won’t be enough to artificially prop up the market any more.
So please, plan — and invest — accordingly!
Until next time,
Mike
P.S. Regardless of what Bernanke says, you must protect yourself as this great financial crisis continues to unfold. That’s precisely why we created our all-new video, America’s Financial Doomsday. Click here to watch this remarkable, brand-new video right now.
{ 5 comments… read them below or add one }
Mike Larson wrote: “You can’t just keep shafting 98 percent of America so a few Wall Street bankers can buy themselves an extra Ferrari or two!”
Bingo!
Mike, I thought you were one of the sharpest people I read. I have learned so much from reading your columns, but …
this comment moves you out of the runner up category and puts you right at the top of the list.
You are now the sharpest investment guy in the room! IMHO.
Now, can you please just bottle it….
Mike, I am still surprised by your contradictory style of argumentation. Sometimes you argue that the QE’s will cause massive general price inflation (they have not), sometimes you argue that the QE’s will cause asset price inflation (which others have called ‘reflation’ and has not even reached old market highs despite high corporate earnings) and now you are arguing that the QE’s have caused selective asset inflation (leaving out real estate).
A few years ago you argued that real estate inflation was on the way back and you advised your readers to jump back into selective real estate markets such as Florida. Boy, that was hugely wrong.
I am thrilled, however, that you are using the word ‘inflation’ for those asset price increases when most euphemistically call them ‘appreciation’ and increases in real wealth. You are correct in your heterodox definition of inflation here.
You have argued that 10-Year Treasury interest rates would shoot up with all this QE money expansion. They have been at record lows!! You have been completely wrong on that. Why do you suppose that is?
Chartalism has an explanation for it. They say that when any entity can create money and then “borrow” that money by issuing bonds, they are NOT really borrowing anything! This is why your prognosis that the US will follow the PIIGS countries is also very wrong. The PIIGS borrow a quasi-foreign currency (i.e., the Euro) when they sell their bonds. Since the Germans and French are the heavy weights backstopping the Euro, one can see why the PIIGS are mostly denominating their bonds in a foreign currency.
So, one may ask, why does the USA even use a central bank in the money creation game anyway? Since it really is just the Treasury issuing the money, why use this two-step process of the Fed creating the money and buying the Treasuries. Well, because the folks who came up with the Fed central bank idea a century ago were private bankers and they weren’t stupid. By making it a two-step process, they get to collect interest on the money-making process and they get a central bank and sovereign governments to backstop their market failures. More revenue with less risk. Cha-Ching!
Even though your analysis is built on faulty and contradictory ideas, one can still get excited about what is happening in those PIIGS countries! It is not a bad thing. It is more like the pain of delivering a new baby. They are at a point in human social development that may cause an historical transformation. It actually began in the tiny European country Icleand. Iceland is the first to give birth to this new and wonderful future for humanity. See how at this link:
http://sacsis.org.za/site/article/728.1
PS Although I don’t think the author is correct about Iceland being a member of the EU or the Eurozone, the bulk of the article is correct.
Steve Loebs, thank you for the balanced analysis. I especially liked your link to the article about Iceland. What it describes sounds similar to how US citizens bailed out AIG’s private counterparties. Ours wasn’t as forthright as Iceland’s proposal that every man, woman and child pay $130 per month for 15 years to reimburse reckless investors.
M&M should give you a monthly guest article!
Thanks, Mark F. I am not a perma-bear so I doubt I would ever be offered a guest article.
oh now you tell me;)