Yesterday’s Fed announcement, the hint of more QE (Quantitative Easing = moronic PhD speak for money printing) sent gold into a tizzy. Bonds spiked a bit too. Stocks only managed to limp their way back to breakeven.
Today, gold is firing, bonds are up a bit and stocks are weak. If the tea leaves are correct, I think that investors have figured out that inflation will just be just ok for stocks, but won’t be the boon, meaning the 2009 QE rally in stocks likely won’t reappear (In fact, I think the June to August upmove on the US stock exchanges have already priced in a good chunk of European and Fed QE). However it will be great for commodities, especially gold.
QE Grows the Economy How?
Let’s think this through from an American standpoint. If the Fed prints, and commodities go ballistic again, and gas is $5/gallon and food prices go up another 30%, how’s that going to help the average American? See, in academia, they think that in inflationary times, after a lag, wages will catch up with price increases – but I don’t think most average Americans will get pay raises to compensate for price increases brought on by inflationary money printing. They’ll probably just get laid off as their employer will be facing higher input costs.
Therefore, at least here, locally, American businesses could get hurt. The cheaper dollar could help multinational companies that sell worldwide (when they sell in foreign currencies, they can convert the proceeds of sales back to cheaper ie more dollars and be more “profitable” in USD). But small companies and maybe many mid-sized companies without a global presence may not benefit from QE.
How Will This Play Out?
And the market might see it that way too (judging by yesterday’s and today’s reaction). Unless they are not interested in the Fed’s “threat” of QE and want action – but who knows. My working theory from months back as I have mentioned a few times here, is:
- market weakens
- central bankers stimulate as situations gets dire (they need political cover)
- stocks rally – Euro and emerging market stocks more than US (we just had our rally) but rally far less than from the 2009 and 2010 stimuli
- stocks fall hard
I think this has started to play out but looks more like this:
- market strengthens anticipating stimulus (June til now)
- rising market holds off stimulus as central bankers, at least in US, would look silly to stimulate when stocks are making all time highs (S&P touching it) (notice no action from the Fed recently)
- situation gets really bad, especially in European credit (bond) markets (it’s really bad – they’re inventing weird solutions now-see below)
- European Central Bank morphs into the Fed and gets power for European QE to buy bonds of various troubled EU countries with printed money (they can’t technically do that yet which is a big part of their arguments) – this week hints that German officials might go for this new creative and weird interest cap scheme
- European stocks launch higher, US stocks less so (who am I kidding, they’ll bid US stocks up big too but not as big as Euro, Asian and emerging markets), commodities go into orbit- coming soon
- this lasts for 3-5 months then we have a massive painful experience – coming in ~3-6 months?
Bottom line – QE does inflate asset prices, including stocks, it won’t create any jobs, people in the US will pay more for things, and all of it will likely end badly.
That’s my 2 cents and I hope I’m wrong. But history proves otherwise.
Note: the Fed and the ECB may not act til they get political cover, meaning, there are still enough politicians – for example Germans who fear hyperinflation and inflation hawks here like Ron Paul – that will griddle them if they print money excessively. We may need a real 20% dump in stocks to get the Fed to act but every time stocks fall a bit, traders buy in anticipation of the Fed; but they then drive stock prices up precluding the Fed from acting! A vicious cycle indeed.