Stocks respond positively to QE2 but for how long?
It’s the Ides of December, if December has ides. Some months do. Some don’t.? Yesterday, we drove up to Frederick, Md. It is the site of the encounter, fictional,? between Stonewall Jackson and an old woman. More on that, below.
Those of us who are condemned to follow such things found out that the Fed is standing pat this week. You can imagine how that stirred our blood. We had barely slept before Tuesday, wondering what the Fed would do. We had worn out the carpet, pacing back and forth. And now we discover that the Fed will do nothing!
The “recovery” is too weak to raise rates, said the Fed, and the economy may need more stimulus, it added; so it will stick with its plan to buy $600 billion worth of U..S government debt and maybe even a little more.
You’ll remember that the Fed purchases were supposed to drive down long-term interest rates so that mortgage borrowing and capital investment increased. But instead of falling, long-term rates went up.
On the surface of it, you might think the Fed chief would lower his head…and admit that his quantitative easing plan is a colossal failure. Since March ’09, he has committed an amount equal to more than an entire year’s output of the U.S. economy to his QE initiatives. With so much of the nation’s treasure lost, you’d think he’d offer to slit his wrists or at least resign, but that would just go to show that you’ve never studied modern macroeconomics. If you spent a few more years in school, maybe you too could begin to see that up is really down and black is actually white. The Fed’s actions will quadruple the U.S monetary base. Is it any wonder investors are getting suspicious of U.S. dollar-denominated paper?
In theory, the Fed’s purchases of Treasury debt are absurd. In practice, they have backfired. So, the Fed will do more of them. Makes sense, right?
The U.S. bond market could be signaling that it is headed the way of Greece, Ireland, and Lehman Bros. Who wants an IOU from someone who can’t pay it back? Once the selling begins, it is hard to stop. Interest rates go up, increasing the cost of financing for the debtor. Pretty soon, he can no longer fund his on-going expenses or make the payments on his debt. He is forced into bankruptcy.
Meanwhile, the latest numbers from Robert Shiller tell us that the US stock market is 33% overvalued. Our guess is that stocks will go down much more than that number implies. Markets tend to overshoot in both directions.
The latest news from China tells us that the Middle Kingdom could blow up at any time. Nearly half the GDP is spent on capital improvements (usually things that involve concrete and steel). It’s breathtaking to see it, but there’s no way you can make that many capital investment decisions without making some colossal blunders.
From Europe comes a bleak and foreboding assessment: European banks have five times as much government debt as they did 3 years ago and even U.S. banks have nearly $350 billion worth of debt from Europe’s wave-washed periphery. Investors are selling off Spanish bonds; another chapter in the debt crisis could be at hand.? Dear reader, you are faced with a grave and dangerous situation. In front of you is the Valley of Death for investors.
America’s stock market could crash at any moment. Its bonds are slipping. Its homes are sinking. China could collapse into a heap. Europe could come unglued. Trade could fall off a cliff. Interest rates could rise everywhere. Another great depression could be coming soon.
CEOs are optimistic, says one report. Investors are overwhelmingly bullish, says another. And your captains are telling you to “charge ahead!”
Our advice: Take cover!
No Admitting Defeat: Fed to Fight Failure With More Stimulus by Bill Bonner originally appeared in the Daily Reckoning.
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