‘The summer sun is fading as the year grows old, and darker days are drawing near, the winter winds will be much colder, now you’re not here’ (Justin Hayward & Jeff Wayne – 1974).
Here in Europe we said goodbye to summer(time) 2010 and stepped into autumn. More rain, more wind, lower temperatures, a lit fireplace and since the clock went back one hour over the weekend, it will be dark one hour earlier than last week as well. Darkness is descending over Europe, and I’m not only talking about the nearing economic depression. It also implies that the time difference between Europe and the US East Coast is only 5 hours this week, so QE2 will be announced at 19:15, not the usual 20:15, this Wednesday (unless Bernanke comes to his senses…..yeah right!).
It was also Halloween weekend and this started off with quite a scare. For a brief moment the mid-term elections and QE2 were pushed to the background by Friday’s news that 2 bombs were found inside printer cartridges on planes from the middle-east en route to Chicago. One bomb was intercepted in Dubai, while the other was caught in London. No one knows as of yet if those 2 bombs were the only ones bound for the US, let’s hope they were. On the markets there was NO reaction at all, the S&P traded in a tight 6-point trading range all day. Apparently terrorist threats have become part of our everyday lives, which is scary in itself, or maybe QE2 is believed to be anti-terroristic as well. We choose to believe everything fairy tale Bernanke tells us anyway.
So here we are, 2 ½ trading days before what will be a game-changing event: QE2. The chance that there will be QE2 of some magnitude is 99.9%, so the bigger question is: what will happen after it has been announced, in 3 months, 6 months or even 2 years down the road.
The answer is: NOBODY knows. The only thing that is clear is that the risks, introduced in the economy, are growing as a result of monetary easing and it’s not clear if the FED can counter those risks in the future. It’s a tightrope that Bernanke is walking and the risk of falling off a cliff left or right is extremely high.
On the one hand QE2 might achieve nothing which almost certainly means the US will follow down the path of Japan, where the economy has not been growing in the last 15 years. On the other it might introduce inflation, a lot of inflation, but inflation itself will not stimulate the economy, the mechanism that takes care of that is the ‘velocity of money’. This has been hit hard by the deleveraging in the economy, on the banking side as well as on the consumer side. Introducing more liquidity (as if there is a liquidity shortage at the moment) won’t increase the velocity of money if on the other side de-leveraging still continues. But it does have an inflationary impact through a lower dollar. If this is the case, higher inflation without a higher velocity of money and therefore a still sluggish economy, then what can the FED do to stop inflation from spiking higher and higher? They won’t be able to do what they always do: raise rates, they will drive the economy into a deep depression if those measures are taken. So we will have runaway inflation with no means to hold it back, not a pretty picture at all.
Gonzalo Lira, on his blog this weekend, calls for a steadily increasing CPI averaging 30% by the end of 2012 culminating in the collapse of the $ and the US economy. Just in time for the end of the world, as predicted by The Mayans. Goodbye money, goodbye earth. Maybe that’s why Bernanke is not looking for a real solution to these problems at hand, we won’t last long enough anyway. (Don’t go throw away all your hard-earned cash just yet, because some scientist figured out that the Mayan calendar doesn’t stop in 2012, but in December 2208, good thing I did not go see that movie after all.)
The markets ended the week just like they had been trading all along, unchanged. October 22nd the S&P500 closed at 1.183,08 while this Friday it closed at 1.183,26 A whopping gain of 0.18 points! The VIX however closed 2.4 points higher as more and more market participants are trying to insure themselves against a lower than expected QE2 announcement and trade-war tensions keep building.
Dow +0.04% SP500 -0.04% Nasdaq +0.00% EUR$ 1.392 WTI $1.4 Gold $1360
Treasuries ended higher, sending yields on the 10yr lower to 2.60%
We have a lot of economic data this week, ranging from ISM to Non Farm Payrolls, but Wednesday’s FED meeting will be the most watched event of the week.
Mid-term elections 2 days away, QE2 3 days!
Happy Hunting & Let’s Be Careful out there!!!
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