I had proposed at the beginning of QE2, we are now in a QEn environment. My working assumption is when QE2 ended last spring we'd have about a 6-8 month window before the desperate Federal Reserve began QE3. I was thrown a curveball with Operation Twist instead – although my time frame was accurate; it was just a program of a different flavor. But no worries, yesterday Bernanke kicked the door open and whispered songs of additional measures at every opportunity possible during his news conference. This fits with my working theory that aside from LTRO this incredible strength in the market was similar to the "pre game" we saw ahead of the official QE2 announcement. This is the "David Tepper" effect we saw fall 2010 where "if the economy improves, it is good for the market – buy stocks. If the economy falters, it is good for the markets as the Fed will QE – buy everything."
Hence, go forward we have to change our working assumption to one that includes another massive program of asset purchases (many believe these will be concentrated on mortgage backed securities to get mortgage rates even lower than their current record rates). Whatever the case, gold (and silver) reacted accordingly….
……and we are in another round of global stimulus – this time with the ECB joining forces. I'd also point out the UK printed a poor GDP figure yesterday and we certainly should expect a new round of quantitative easing out of the Bank of England shortly as well. Of course, in the very short term this is now all "known" news, so we'll see how long the market can continue the non stop 'teflon' rally without nary a resting point.
- Bernanke on Wednesday opened the door a bit wider for the Fed to return to buying securities in the months ahead to buttress a weak recovery and keep inflation from slipping too far below its newly adopted 2-percent target.
- "It sounds like the finger is on the trigger," said Thomas Simons, a money market economist at Jefferies & Co.
- "Probably the main take-away from the press conference is the sense conveyed by Bernanke that it would not take much of a disappointment in growth or inflation to get the Fed to start another round of QE," said Michael Feroli, chief U.S. economist at J.P. Morgan. "In fact, from his answers it's not even clear any disappointment would be necessary to see more QE," Feroli wrote in a note, adding he was not forecasting another round of asset purchases even if the bar for action was low.
- "I think it could happen any time now, based on the language that we saw today," said Eric Stein, a portfolio manager at Eaton Vance in Boston.
- Economists at 12 of 18 primary dealers, the large financial institutions that do business directly with the Fed, believe the central bank will undertake further quantitative easing, according to a Reuters poll after Bernanke's news conference.
- The Fed has trained its sights on the stalled housing market in recent months, so any move to QE3 is most widely expected to involve buying mortgage securities to help bring down further already record-low mortgage interest rates.
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