Sunday, July 8, 2012

QE3, what would you do?

Walk a mile in their shoes

It seems that the news media wants us to believe that market traders want another round of easing.. and they want it now.  But, lets take a look at the concept from the eyes of Ben Bernanke and the rest of his staff.  Here are six reasons I think QE3 is unlikely anytime soon.

1.  Its really not that bad.  The jobs numbers have been admittedly weak, but they're not end of the world bad like some news outlets (more specifically individual commentators) may lead us to believe.

2.  The Fed just announced a continuation of "Operation Twist" through the end of the year.  This is their current countermeasure for a slump in economic data.  I can't imagine a sensible person that wouldn't think we should wait to see if this worked before throwing more cash into the market.

3.  The stock market is not the economy.  While in theory it should be a reflection of the economy, it just isn't really.  And even if it was, the equity market it is doing just fine.  We just had our annual swoon, and are moving back up.  It seems like short term traders cry like toddlers in a grocery store anytime they don't get their way.  They would do well to scale out their charts to a weekly (or greater) scale and review the "photo grande."  Besides, I gotta think that as slow as the Fed moves, it is unlikely that they are interested in any short term gyrations in the markets.

4.   The law of diminishing returns tells us that each round of easing will be less effective than the previous.  Given this, the impact of adding liquidity to the market would probably be little more than a sugar rush for day traders.  Besides, if you were a business owner, would QE3 make you want to hire people?  Probably not by itself.  What you would want is some serious policy changes.  Those would only come with a changing of the guard in DC.  So, if I was Ben, I'd probably just wait it out to see what happens in the election, saving the last bullet for a real disaster.

5.  The Fiscal Cliff.  What a doomsday event this thing is.  Lets see.. if Obama wins the election the situation likely ends is a stalemate and we go off the cliff because our elected leaders tend act like children  refusing to shake hands at the end of the little league game.  If Romney wins, he won't be sworn in until January, which leaves the Battleship US drifting through murky economic waters without a leader able to affect change throughout November and December. That is when the ship drifts into the underwater mine of the Fiscal Cliff.  This is the time we will need that last set of countermeasures from the Fed.

6.  A race to devalue currency.  I didn't really understand what this meant until I started reading a couple books written by gold bugs.  The ah-ha moment came when I realized that when the value of our dollar goes down, the value of the objects I have, or want to have, goes up in US dollar terms.  For example, lets say I'm a farmer selling a box of peaches for $10 USD.  If the value of the USD declines, the $10 bill that would have bought my peaches is no longer equal to the peaches' value.  Now, my peaches are worth, lets just say, $12 USD.  The same is true of your "stock certificates".  When the USD declines, it requires more money, in US dollar terms, to equal the value of your shares of stock. This gives you the illusion that your stock is worth more.  In actuality, if you compared the value of your stock to another commodity, lets just say gold, the value of the stock priced in equivalent grams of gold probably wouldn't change unless the actual value of the goods changed.   Multiply that concept across the entire equity market and, voila, the market goes up when money is injected and the USD devalued.  Your stock  isn't really worth more, but the numbers trick you into believing it is.  So, over the last couple years the USD has been plummeting while the Euro and price of gold has been increasing.  Now the Euro is on the decline because of their ongoing financial saga.  So adding more cash into the market effectively causes us to race the world to the bottom.  What happens when the get there?  I honestly don't know, but I don't think it will be pretty.

All these reasons give me no reason to expect QE3 through the rest of this year.  Good luck this week!

No comments:

Post a Comment