Does the G-20 communique mean QEII is not going to happen?
Posted on 24 October 2010 with 5 comments from readers
Permit ArabianMoney to point out that the G-20 communique issued at the end of the summit this weekend would appear to contain a categorical commitment by the United States not to do any more quantitative easy or money printing to try to devalue its way out of its present economic mess.
Is that not what the following statement means? Nations agree to ‘move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies’.
Hypocrisy rules
It is pretty clear what that means. And yet the Japanese quickly made it plain that this did not apply to the yen. The US will doubtless wriggle out of a ’strong dollar’ policy with some slightly less obvious hypocrisy.
Imagine what would happen in the US did suddenly now turn its back on QEII and do the reverse. Stock markets would instantly crash and the bond market rally because it is only the flow of cheap funds from the Fed that has kept markets inflating in the face of a continued poor economy.
That would indeed produce a stronger dollar as money would flow back from equities and into the greenback in any sell-off. Indeed this process might already have started. Certainly the rally in the dollar and pull back in gold prices last week looked a bit of a turning point.
Calm before the storm?
Confidence in the outlook for the stock market is close to the bullish highs seen before previous corrections and the VIX index is relatively low. There is the same air of calm before the storm that preceded previous major moves.
Currency issues are often the tripping point for financial markets. They do after all strike at the heart of real valuations. Stock markets that rise as the currency falls are in a meaningful sense going nowhere. And this has been the fate of the US equity market recently.
All it requires is for US equity investors to feel that even if they hold the right companies then they are invested in the wrong currency and it is obviously time to head for the exit door. And the problem is that everybody always decides to do that at the same time.
5 Comments posted by readers:
Bloomberg TV recently had an interesting interview with Jeffery Gundlach, CEO of Doubleline Capital. Here is a quote, after he was asked about what he sees for the future of the US economy, “I really think that we have something, I hate to say this, but something of an economic crisis coming, where it will be obvious that policies will have to change in order to get away from this share of the population that is really not working. That is a growing share. Unemployment is around 10%.” He went on to say that what he calls the ‘borrowing based US economy’ has to come to and end, and will, within a maximun of 2 years. He said the ‘lid will blow off the pressure cooker’ within 2 years. He said he expects an ‘investment disaster’ within that time period. He said he now only invests for 6 to 9 months ahead.
far from clear IMV.
How fast will you “move towards”?
To what extent will you “move towards”?
When will you start this “move towards”?
How will “move towards” be measured?
The statement is ambiguous and non-explicit thereby rendering it harmless to US economic policy.
@nigel: Yep, that sums it up nicely.
On the Nature of Politicians:
In reality, there will be no “moving towards” at all, but there will be lots of talk about “moving towards.” Geithner and Bernanke have proven by their own words and egregious actions that they are not to be trusted. If they enact a massive QE2, the markets will eventually fall under the weight; if they don’t, the markets will still fall, although much, much more quickly.
And the same “behaviour” holds true for Obama. After the mid-term elections ( a true “watershed event” for Obama!), he will “talk the talk” (and there is no one better!), but that’s all it will be. Just talk! He will say he has heard the American people, and that he understands the need for fiscal discipline. Yeah, right, this Marxist Socialist is gonna finally “get religion?”
The best thing that the US government can do is to stop meddling and stop manipulating; but the nature of politicians does not allow them to “do nothing.”
They’ll continue to print until they run out of ink, because they don’t know what else to do.
Something is going on behind these closed doors these days. Manipulation is beyond obvious here as even a blind person can most likely sense this manipulation. Everyone at the G20 meeting complained at criticized the weakening USD and yet Monday morning comes along and the USD continues to weaken and Asian markets set new highs with a bullish start for the week. US Futures are up and I bet we will close up over 100 points on Monday when the DOW opens.
I still like LVS and MPEL. If you can beat them join them. Why fight the trend and try and take down a bullish bull. Whether we like it or not and whether or not the current bull run makes sense or not we are going up just like housing prices did in Dubai before the big crash and reality kicked in. The only difference here is that Asia will sustain their gains as they have good growth each year while this is not the case for the US and Dubai. Local demand is key to support for anything and growth numbers in highly populated areas with good export numbers are less likely to come crashing down compared to transit centers with low population numbers.
Comment by Andy: Manipulation is beyond obvious here . . .
Yeah, but there’s an ol’ saying about stock market investing, and I’m sure you’ve heard it before:
“bulls will make money, and bears will make money, but pigs just get slaughtered.”
This ol’ saying is particularly appropriate when we analyze the recent performance of LVS and/or MPEL.
In other words, this massive and on-going manipulation game can go on for only so long. Currently the only BIG players in this market are the banks themselves and the FED. This can’t last, and it won’t. At some point in the near future, a big bank is gonna take their chips off the table; this will lead to another bank doing the same thing . . . and then?
Something’s gotta give.