Fed minutes casts doubt on long-term QE and financial markets sell-off after a peak in buy orders marks the topPosted on 04 January 2013 with 7 comments from readers
The euphoria of the New Year rally came to an end yesterday with the release of Fed minutes reporting that members are divided on the need to further expand its balance sheet with more quantitive easing or electronic money printing.
As a presumption of unlimited QE for as long as it takes to get unemployment down to 6.5 per cent is the foundation for the recent rally in financial markets both stocks and commodities sold off sharply, giving back most of the previous day’s gains.
On New Year’s Day some 90 per cent of broker orders were buy orders, a spectacular skew to the positive that normally indicates a moment prior to a market reversal. The point of maximum optimism is by its nature a market peak that is unsustainable.
Still you needed to be an extremely brave contrarian to short the market at that point. Perhaps not now that the market has most likely reversed direction, unless the Federal Reserve issues a statement that contradicts its minutes and that is unlikely.
Could this be the start of the 20 per cent or more sell-off that contrarians like Dr. Marc Faber have been calling? We thought heretically for a brief moment on New Year’s Day and wondered if the king of the Barron’s Roundtable was wrong this year. It would seem not.
Contrarians believe that following the crowd in investment is almost always a mistake and that herds of investors are usually wrong. The writer Gustave LeBon pointed out that a crowd of people has the intellect of a blockhead.
Will the same people who evinced such optimism about the future on New Year’s Day now all rush for the exit at the same time? Dr. Faber will probably have the last laugh on this one.
Bad fiscal cliff patch
As ArabianMoney sagely noted at the time, though nobody paid any notice, the deal on the US fiscal cliff is a patch and many issues are still unresolved. However, we had not thought that included the Fed’s policy of unlimited QE.
That said if the sell-off in financial markets is now brutal enough in response to the Fed minutes we would still see no alternative policy available. The Fed is boxed into a corner by its previous actions. Besides what happens to all the money it has already created?
This liquidity will have to go somewhere and if not into the bond market – because rising interest rates are coming that depress bond prices – then gold and silver?