How much pain will Bernanke allow before going for QE3?
Posted on 08 June 2011 with 10 comments from readers
Financial markets and even bullion sold off again in the wake of Fed chairman Ben Bernanke’s downbeat comments on the US economy last night with not a hint of a possible QE3 money printing exercise to stimulate the economy.
The reasonable fear in markets is that the ‘Bernanke put’ is over, and that without the Fed as the buyer of last resort financial markets will crumble. Then again you could argue why would you expect a QE3 to be any more effective than a QE2.
QE2 boost
Except of course from the perspective of financial markets QE2 has been great news. It put a quick stop to the 17 per cent stock market slump last summer and paved the way for another rally, until a little over five weeks ago when the end of QE2 began to worry investors.
Now that the political support for another bailout package has completely gone in the US, there is only QE3 that might be pulled like a rabbit from a hat to save markets from falling through the floor. How much pain can Bernanke tolerate?
He looked a bit like a man in pain himself last night. A great deal of money has been spent to engineer a recovery that is so weak that it is not delivering jobs and may be unsustainable without more money.
There are clearly limits to what US monetary policy alone can achieve as Bernanke admitted. An asset price correction looks already in progress and set to last for sometime, and then presumably Bernanke will step in to stop the very worst of a deflationary bust.
Great Depression
This student of the Great Depression knows that a deflationary bust is worse than an inflationary stagnation, and he will no doubt choose the lesser of two evils. As ArabianMoney has noted on my occasions you would then want to be invested in asset classes that would benefit from inflation like gold and particularly silver.
But everything goes down with a sinking ship, even precious metals although beware the bounce back might be very fast. That is why ‘bond king’ Bill Gross has so much cash. It is not because the US dollar has a great future. It is just that most things are priced in US dollars when they fall in value.
Will the markets now test Bernanke’s resolve with a really big sell-off? He did as good as throw down the gauntlet last night.
10 Comments posted by readers:
A debt default by the US would ‘create a HUGE PANIC GLOBALLY’ said an official with the Indian Central Bank.
China WARNS US, debt default idea is ‘playing with fire’.
Is Congress listening? About 10 weeks left, and we may find out.
So what Departments of the Federal Government do we close to avoid a default?
First shut down all the National Parks. Then Education, Agriculture, Transportation, Interior, NASA, Center for Disease Control, Justice (Declare anyone arrested for a Federal crime a terrorist under the Patriot Act, and shoot them, like Stalin did) & State (Tell anyone that if they mess with us, we will just nuke them. No more diplomacy crap. From now on, the USA talks with bombs.). Quit paying Government contractors, except for fuel for the military.
See how simple things are when you are broke.
What would you shut down to avoid a global default melt down?
And yet another brilliant article by Paul B. Farrell at http://www.marketwatch.com : “We need an ‘Evil Plan’ to foil our own leaders”. He is right, you know.
Meredith Whitney, of wrong muni default claim on ‘60 Minutes’ is on CNBC.
She forgot that local governments can raise taxes, and lay off a LOT of people.
Take schools. I went to Catholic school with 62 children in a class, until high school, where it dropped to about 42. I see classes today with 20 kids in them ! Guess why we are broke. We’ve got granny state schools coddling these little kids. You can’t even cane the kids in high school anymore, like the Brothers did me. (Picking up trash and cleaning windows on Saturday was far worse.) And fire departments! You could cut them in half, and not that many more people would burn up in fires. Same with the cops. You could fire 40% of them without the criminals taking over most of the country. The 15% of the work force that are State and local government employees can be cut a lot. I wonder how that will help the economy? Housing?
When peak oil hits, you will need your own firearms anyway. Don’t forget the bullets. They will be hard to find. Stock up on booze, cigarettes (watch the film ‘Enemy at the Gates’ and you will see why you WILL need the smokes, or have your house flooded for a month, like I did) and acetaminophen too. Get some codeine if you can, because it treats all of the most common illnesses of man better than any other single drug, pain, diarrhea, and insomnia.
Now you should be ready for the default. Have fun.
Venezuela announced that they would still sell the USA oil, despite the new USA embargo we put on them. That would be cheaper than shipping it to Canada first.
while the US is not defaulting this year, bill, i am long gold….this is a journey not a cliff jump…….but mostly agree w/rest of your rant,buddy.
@ Bill, near Slidell:
Certainly your comments are good food for thought!
Here in California, you could easily lay off 50% of the state and municipal police & firemen, and no one would notice; ditto the teachers (although any talk of laying off teachers is considered “heresy” here!). Firemen in CA hardly do any work until the September/October timeframe anyway, so during those months, those who were put on lay-off could be hired again as Temps.
Here’s a few more factoids, for the new “Obama Economy”:
- Approx. 11% of US homes are now empty
- Approx. 65% of US homes are “under water” (i.e. the homeowners equity has been reduced to zero); if some of those folks are laid off, they’ll skip their mortgage payment, adding to the banking crisis
- Case-Schiller reports that US housing will continue to decline over the next year; in some areas, the additional decline may be 20% (more bad news for the banks!)
Stealth QE vs. QE-3:
As some very astute investment advisors have been saying since January, the FED doesn’t have to start another round of QE (i.e. QE3) for a long time, because the FED’s balance sheet is so large that they can execute a “stealth QE” with approx. $600 billion in roll-overs.
No doubt, the Bernank is trapped and will likely crank up the printing presses again at some point. My guess is that he’ll execute “stealth QE” for as long as he can, but will then have to execute a QE-3, probably by the end of 2011.
Fibonacci Time Relation to Fear Factor predicts Drop on July 4th
Could be just a coincidence. After 2 years of being pounded, even bears are looking for the bullish case.
But this Fibo time prediction is at least curious, it is using the Fear
Factor to predict a spike in Fear on July 4th, that would not a bottom
but the start of a rapid decline. Drop a comment or even your own
chart.
http://oahutrading.blogspot.com/
@ Bill near Slidell Nice rant, but what about military spending. I’m guessing most ppl looking in at the US from outside, realize quickly what your biggest budgetary problem is. The average American doesn’t seem to focus on that.
@ obewon
Apparently the the home vacancy rate was 14% last year at 19 million. Wow.
11% US homes vacant this year. That’s 11% of 131 million American housing units. Incredible number. I just checked, that’s 2x the entire Canadian housing stock – the ENTIRE Canadian inventory of houses is 6.7 million and we have 10% of your population. TWICE the inventory of Canada’s homes, are sitting vacant in the US. Mind boggling.
@james……yep, can’t afford to be world’s cop…..not working out well anyway….while the empty house # is very HIGH comparatively, you must remember it includes empty rental houses{3 mil} and empty SEASONAL use homes{4 mil}(which is a normal situation)
but yes, what is left is 7 yrs. population growth worth of houses NORMALLY FOR SALE on the market(normal is 2yrs. worth)….still a strangulation number considering no one is buying(except in the money printing party towns of D.C. and N.Y.
u ain’t seen mind blowing yet:
http://www.businessinsider.com/there-are-now-enough-vacant-properties-in-china-to-house-over-half-of-america-2010-9
@ James M.:
Here’s a very interesting graphic that shows US housing prices from 1970 to 2011, priced in the real currency, namely gold.
Go here: http://www.chartoftheday.com/20110610.htm?T
A shocking graphic! As JP Morgan once said:
“Gold is money, and nothing else.”
‘nuf said!
@ James M.:
Although this link was not the source where I got those stats (shown above), here’s a very interesting audio commentary from Chris Whalen, who is considered by many financial experts as being the best banking analyst in the world.
Go here: http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/4_Chris_Whalen_files/Chris%20Whalen%206%3A4%3A2011.mp3
His view is that, since “state support” of housing has ended, housing prices have a lot further to fall. Hmm, maybe the average home price will be only 90 oz of gold by next year?
chris whalen is with a doubt THE bank analyst.
@ Boatman & James M.:
The stats that we have shown here represent homes that are already vacant. But what about homes which are occupied by “squatters” who have not made a mortgage payment in years?
Here’s a very interesting commentary about that:
http://www.zerohedge.com/article/meet-squatters-here-are-millions-americans-who-live-mortgage-free-5-years-and-counting
An excerpt:
“Some 4.2 million mortgage borrowers are either seriously delinquent or have had their cases referred to lawyers to pursue foreclosure auctions, according to LPS Applied Analytics. Of those, two-thirds have made no payments at all for at least a year, and nearly one-third have gone more than two years.”