|
I had been fairly negative on the need for additional quantitative easing since the earlier part of the year given that
my views were centered around the fact that the first two rounds of easing did nothing
to really spur the economy and that the first rounds
of easing were to help
the stock market and not the average
American still struggling
with overwhelming debt, unemployment and an inability to feel any sort of improving
conditions. We all know that
easing is really meant to help the stock market you see
because that is what the Federal
Reserve is really concerned with.
I had written a lot in the early part of the year that I didn’t expect any easing
until at least the fall and today’s FED
minutes confirm my earlier hypothesis that if we were
going to see any additional QE measures then they would more likely than not take place in the latter part of the year.
Today’s FED minutes essentially
confirmed my earlier thinking. The Federal Reserve was quite clear on their language in the minutes released today. Reuters summarized
the minutes as follows:
The Federal Reserve is likely to deliver another round of monetary
stimulus "fairly soon"
unless the economy improves considerably, minutes from the central bank's August
meeting show.
While the meeting was held before
a recent improvement in the economic
data, including a stronger-than-expected
July reading for U.S. employment,
policymakers were pretty categorical about their dissatisfaction with the current outlook.
"Many members judged that additional
monetary accommodation would
likely be warranted fairly soon unless incoming
information pointed to a substantial
and sustainable strengthening
in the pace of the economic recovery," the Fed said in minutes to its July
31-Aug. 1 meeting.
There is always a tug
of war so to speak about what the Federal Reserve wants to do and
what the market seems to tell us. We continue
to hear over-inflated hype about any signs of improvement in the underlying economy yet the Federal Reserve refuses
to take the QE option off the table. This leads me
to think that this is really
about FED Chairman Bernanke’s addiction/desire to ensure that the stock markets don’t lose any of their gains, despite a 12% increase in the year to date general stock markets. We all know that continued double digit growth in the stock markets, while perfectly acceptable for
“long” investors, is
not sustainable and hefty
stock market returns often lead to bubbles. This is a concern that is somewhat
lost on the Chairman because
notwithstanding the stock market’s
performance, he seems quite intent/focussed on ensuring that those gains continue to materialize. It is in a sense, a double edged sword. Do you let the market act “freely” or do you have Central Bank support which
is in no way allowing the market to move on earnings anymore but instead allowing it to move on the back of monetary
influx, (printing money to support stocks which clearly don’t need it at
the moment).
I maintain my sentiments from earlier this year that
implied that we were going
to see a round of easing before year end. Whether or not the market really needs it is irrelevant
because it appears it really
isn’t about need anymore but what the Federal Reserve’s Chairman wants.
That, in and of itself, not letting
the markets act in a true “free market” sense is frightening because it has the potential to further inflate bubbles that never have happy endings.
Gold spiked on the release of the minutes and the stock markets paired their losses. As always though, we must wait to see whether these
gains are knee jerk reactions
or sustainable break-outs
that can lead to further gains. Have the recent
gains in the stock market and the gold market already priced in expectations of additional
easing? Is more to come? My
thoughts are that if you trade this
news, wait until the
initial knee jerk reactions
and confusion subsides. Trade a calm market, not a market that is still
trying to make heads or tails of the news.
In my view, a confirmation of a renewed bull move in silver will require the price to convincingly break out
above the $32.00 level. We are still a ways off from that so we
need to assure ourselves that this isn’t
just a counter-trend bounce in a continued downward move. As a longer term silver bull, and investor in junior exploration/mining
companies I’m not complaining about these moves. My hope on the long side is that
they continue. The real question though that is
still unanswered is how much of this recent move has already priced in additional easing.
|
