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The Fed Flashes the Nuclear QE Trump CardGary Dorsch Of ten people who hear the same story or speech, each one might understand it differently. Perhaps, only one of them will understand it correctly. On July 21st, Federal Reserve chief Ben Bernanke was speaking in riddles, as central bankers are apt to do, while delivering his testimony before Congress. Each word that’s uttered by the Fed chief is scrutinized by anxious speculators, who try to interpret the message correctly, before quickly placing bets in the marketplace. Bernanke is the captain of a ship that is sailing through some very stormy seas, and is desperately trying to steer the economy away from its worst downturn since the Great Depression. The US-housing market is under-water, and putting enormous financial stress on vast numbers of Americans. A record 270,000 US-homes were seized from delinquent owners in the second quarter, and bankers are on pace to claim more than 1-million properties by the end of 2010. Small businesses, the engine of job creation, - are largely cut-off from credit, and are sputtering. Bernanke acknowledged that the US-economy faces an “unusually uncertain time,” but if necessary, he hinted the central bank would resort to “Quantitative Easing,” (QE), or printing vast quantities of US-dollars, in order to prevent a deflationary spiral. With the US federal funds rate pegged near zero-percent, Bernanke was asked by Senator Jim Bunning if the Fed is “out of bullets,” Bernanke responded, “I don’t think so.We are prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential and price stability.”
Initially, Bernanke’s doublespeak was interpreted to mean that the Fed chief is worried the possibility of a “double-dip” recession. Within minutes, there was a knee-jerk panic sell-off, that knocked the Dow Jones Industrials about 160-points lower, to as low as the 10,065-level. Yields on the US Treasury’s two-year note fell to a new historic low of 56-basis points, in a flight for safety. Such ultra-low yields have until now, been the exclusive trademark of the Japanese bond market. But soon after the gist of Bernanke’s comments were fully digested and analyzed, - the US-stock market indexes began to rebound strongly. Industrial commodities, such as crude oil, copper, aluminum, nickel, and iron-ore were also bid higher. The main message behind Bernanke’s riddle was becoming clearer. The Fed is putting a psychological safety net under the stock market, and if necessary, would print vast quantities of US-dollars, in order to inflate asset markets. Right now, the Fed appears to have enough wiggle room to print vast sums of dollars, under the QE-scheme without running the risk of an outbreak of higher consumer prices. The growth rate of the MZM money supply, a gauge of money readily available for spending is shrinking, and is -1.8% lower from a year ago. The broader M2 aggregate is only +1.9% higher, indicating that banks are still very tight fisted with their depositors’ money, and the excess cash supplied by the Fed, and not yet lending to private businesses or households in a meaningful way.
In order to boost the general level of confidence among US-consumers, the “Plunge Protection Team” (PPT) is determined to prevent a slide in the stock market, - the most visible barometer of the financial health and profitability of America’s largest companies. However, the Conference Board’s Consumer Confidence Index slipped to 50.4 in July, from a high of 62.7 in May, rattled by the downturn in the S&P-500 index in the second quarter. Home prices and the value of investment portfolios are vital to confidence, since consumers tend to spend according to how wealthy they feel. And their spending accounts for about 70% of US-economic activity. In the depths of the “Great Recession,” household net worth sank to as low as $48-trillion. It’s since rebounded 13-percent. Yet even counting the latest stock market recovery, US-net worth would have to rise a further 21% to regain its pre-recession peak of $66-trillion. The result has been shrunken retirement savings accounts and anxiety about spending. The Fed is therefore prepared to unleash all of its weapons, including the nuclear option – QE, in order to prevent the onset of another bearish trend in the stock market. US-consumers are most downbeat about the lack of job prospects. On the flip side, S&P-500 multi-nationals are posting stellar profits, from stronger sales to faster growing economies in China, Brazil, India, and elsewhere. But S&P-500 companies are hoarding their cash surpluses, and their profits are not trickling down to the unemployed US-job seeker or showing-up in better wages. Thus, there’s a clear dichotomy between signs of a stagnant US-economy, which the traders in the Treasury bond market focus upon, and a buoyant US-stock market, where increasing profits are largely generated in foreign markets.
With the Fed chief vowing to keep the overnight loan rate locked near zero percent for an extended period of time, the federal funds futures market is now forecasting no change in Fed policy until the first quarter of 2011. Fixed income investors are moving out further along the yield curve, in order to find better than razor thin rates of return on their savings. The US Treasury 10-year yield briefly fell to a 15-month low of 2.85% last week, on speculation the Fed would use monetary tools, such as purchases of Treasuries and mortgage securities. The yield spread between the US Treasury’s 10-year note, and the German Bund, tumbled by 60-basis points (bps) over the past seven weeks, eroding the value of the US-dollar index by eight-percent. German bund yields bounced slightly above their record lows of 2.50%, after it became increasingly apparent that the ECB is not inclined to cut its 1% repo rate anytime soon. The ECB engineered a recovery of the Euro, from a four-year low of $1.1850, to as high as $1.3045, while traders detected the central bank was phasing out its purchases of Greek and other sovereign debt, at a much earlier than expected date. A so-called stress test, measuring the ability of 91 Euro zone banks to withstand a severe 35% downturn in the stock markets, and a “double-dip” recession, gave 84 of the banks a clean bill of health. The results showed the seven that failed need to raise 27-billion Euros ($35-billion), to meet a Tier 1 capital ratio of 8-percent. This propaganda tool helped to trigger a 100-bps slide in credit default swaps on Greek bonds, to 825-bps this week, and down sharply from a record 1,320-bps. The US-dollar was being utilized by currency traders as a temporary “safe-haven” from a collapsing Euro, amid fears of a Greek default on its 300-billion Euros of debt. But with CDS rates on Greece’s debt receding, the demand for the deficit ridden US-dollar has also waned. In addition to the Euro, the biggest winners in the anti US-dollar sweepstakes were the Australian dollar, Swiss franc, and the British pound. China took advantage of the US-dollar’s rally in May, by dumping$32.5-billion of its holdings of US Treasury notes to US$867.7-billion. To read the rest of this article, click on the hyper-link below: http://sirchartsalot.com/article.php?id=139 ### Gary Dorsch 321gold Ltd |
