Not a hint of QE3 from Ben Bernanke only news of a slower economy

Posted on 23 June 2011 with 1 comment from readers

Anybody hoping for hints about a QE3 money printing program from Fed chairman Ben Bernanke last night was disappointed. All the Fed boss had to offer was a prediction that the US economy would grow more slowly than previously thought.

Interest rates will remain close to zero for at least the next three to four months, and longer if deemed necessary. Not surprisingly US stock markets resumed their fall of the past two months after rallying in a couple of previous sessions.

Irrational exuberance

Is the market now set up for a much bigger fall as its previous irrational exuberance comes home to roost? Bernanke did not kick the legs from under the market by taking back his stimulus but he gave no more. QE2 ends this month.

Other things being equal then the outlook for US stocks would be some sort of stagnation or sidewards trend. However, we live in a dangerous world with many global financial issues that could well drive the US markets much lower.

The eurozone banking crisis lurches from temporary fix to temporary fix and cries out for a far more comprehensive solution like the Brady bonds that the US once issued to aid Latin America or Abu Dhabi provided for Dubai. Yet there is no sign of it and the political will is missing in Europe.

Japan is also a drag on the global economy as it suffers from supply chain production disruptions and power shortages in the aftermath of the earthquake in March. Its quick recovery is written in for the second half of the year and yet looks less and less likely.

China is also slowing down as it tries to engineer a soft landing to its runaway real estate and construction boom. These things do not normally end painlessly, ask Dubai.

Lower oil prices

A slower global economy is lowering oil prices, despite the Arab uprisings that have rolled over from the spring to the summer months. Lower oil prices are not good news for oil producing countries.

Commodity prices are generally on the slide in this economic environment, pulling down their related stocks. Only gold and silver prices seem resilient as precious metals are very much in demand as a currency that cannot be devalued by money printing.

Ben Bernanke may have stopped his printing machine but Japan is arguably providing a QE3 with its response to the earthquake disaster. Could some of that money find its way into US stock markets and support prices? Well, it is a carry trade that has worked for hedge funds in the past.

That said stock markets generally seem to have rallied far ahead of economic reality and are overdue for a major correction, and that seems to have started. Hedge funds are increasing their short positions.