QE3
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QE3 Is Strong Medicine for Dr. Copper
With QE3, Ben Bernanke just gave Dr. Copper a shot in the arm that should carry prices to new highs.
In fact, shortly after the U.S. Federal Reserve announced its decision to launch a third round of bond buying, copper rallied to $3.84 a pound on the Comex division of the New York Mercantile Exchange, up from around $3.35 in mid-August.
But that is only part of the story...
As "the only metal with a Ph.D. in economics' because of its widespread use in industrial applications copper is an excellent bellwether for the state of global economic activity.
And right now copper is predicting a major global rebound.
"Investors' expectations for global economic growth in the fourth quarter are rising and Dr. Copper is rallying," Andrew Rosenberger, senior portfolio manager at Brinker Capital told MarketWatch.
"Copper and other assets which are linked to global growth are taking the approach of rally now, ask questions later," he said.
For investors, there are lots of reasons to like copper right now.
Let's take a look...
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Forget the Punch Bowl, With QE3 Ben's Party is Open Bar
Everything changed on September 13. It's the day Ben Bernanke promised not to take away the punch bowl.
Last Thursday, Helicopter Ben announced that the Fed would start buying $40 billion in mortgage-backed securities -- for as long as it takes. He also announced the Fed will keep rates between 0-0.25%, until mid-2015.
The goal is to keep supporting the mortgage bond market until the employment level improves "sufficiently."
But given that the last several rounds of multi-hundred billion dollar stimulus didn't accomplish that goal, it's hard to see why they'd expect this time to be any different.
Maybe it's just because Paul Krugman was right: They didn't spend enough the first two times (sarcasm intended). Or then again, maybe that's not really their goal...
Consider this: At Jackson Hole just a few weeks ago Bernanke said that, historically, there has only been limited experience with quantitative easing. Therefore central banks, including the Fed, "have been in the process of learning by doing."
Excuse me, but are you freaking kidding me?...
Did Ben skip all his history classes? Has he ever heard of the demise of Rome or Weimar Germany?
More recently, even Argentina and Zimbabwe have had plenty of experience with quantitative easing. Their zealous over-printing led to major devaluation and/or outright currency collapse.
Couldn't Bernanke have checked in with Cristina Kirchner or Robert Mugabe?
The only real difference, and I'll admit it's a substantial one, is that the U.S. dollar is the reserve currency for the world's central banks. But that won't change the outcome.
Instead it may just delay the day of reckoning. In the meantime, it's very likely going to make the situation much, much worse.
So what's the Fed really up to?
Well, here's what I think...
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QE3 Delivers Fresh Ammo for Both Romney and Obama
U.S. Federal Reserve Chairman Ben Bernanke never intended his latest stimulus program, QE3, to become an issue in the 2012 presidential election, but he had to know what would happen.
"We have tried very, very hard, and I think we've been successful...to be nonpartisan and apolitical," Bernanke said at a news conference Thursday after the official Fed announcement of QE3. "We make our decisions based entirely on the state of the economy....So we just don't take those [political] factors into account. And we think that's the best way to maintain our independence and maintain the trust of the public."
In case you missed it, the Fed's third round of quantitative easing entails the purchase of $40 billion of mortgage-backed securities each month until unemployment shows a marked improvement.
In other words, for as long as it takes.
But with QE3 arriving less than 60 days before a bitterly contested presidential election, the Fed move was bound to get caught up in the campaign.
Both sides reacted immediately, with Republicans criticizing QE3 as unnecessary while Democrats applauded.
A few Republicans even accused Bernanke of timing QE3 intentionally to boost President Obama's re-election chances.
For the record, Bernanke is himself a Republican, appointed chairman of the Federal Reserve by President George W. Bush in 2006 and re-appointed by President Obama in 2010.
But with the Fed becoming a GOP bogeyman in recent years (thanks largely to the attacks from Rep. Ron Paul, R-TX), QE3 was bound to become weaponized in this year's increasingly acrimonious campaign.
Don't be fooled when each political party throws out the following QE3-fueled lines to get your vote.
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How QE3 – Like QE1 and QE2 – Will Trigger Inflation
The traditional safe haven assets of gold (NYSE: GLD) and silver (NYSE: SLV) have surged in price due to the announcement of the latest round of quantitative easing, QE3 - but those aren't the only assets QE3 will push higher.
While QE3 might seem harmless to U.S. consumers, it is present every time they gas up their cars or buy food at the grocery store.
In fact, all three rounds of quantitative easing have led to higher priced commodities.
Whether you realize it or not, QE3 - same as the stimulus programs before it - is adding greatly to the costs of everyday life. QE3 is directly leading to higher prices for oil, food and the cost of imported goods.
Over time, that results in a tremendous consumer expense in all product and service categories.
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When it Comes to QE3, Ben Should Have Tried the Helicopter
At last Thursday's Fed meeting, Ben Bernanke finally played his last card.
With an open-ended promise to buy $40 billion a month in agency-guaranteed mortgage bonds, the Fed Chief turned QE3 into a much larger gift called "QE Infinity."
But the truth is he would have been better off if he had tried the helicopter.
For those who forget the reference, Ben's first foray into national fame came in November 2002, when he delivered his famous "helicopter speech" at the National Economists Club in a Washington, DC Chinese restaurant.
Little did I know that day that I was about to witness history as Bernanke said the risk of deflation was so great that the Fed should drop interest rates to zero and consider using further measures -- such as dropping $100 bills from helicopters -- to "stimulate" the economy.
Of course, I blotted my Fed copybook for the next decade by asking a snotty question since I objected to his central premise that the risk of deflation was either imminent or would be disastrous when it happened.
The idea that deflation was imminent at the time was simply ridiculous. Consumer price inflation, on official BLS statistics which consistently understate it by about 1%, was 2.5% in 2002, 2.0% in 2003 and 3.3% in 2004.
Even then, Bernanke's economics weren't that well connected with reality.
The Problem with QE1...QE2...QE3 and QE Forever
The reality today is that it just doesn't work.
Bernanke's various "quantitative easing" policies have benefited primarily Wall Street; the mechanism by which they have fed through to the real economy is at best very indirect.
Currently for example, the Fed is now set to buy a total of $85 billion a month in long-term bonds, through the new mortgage bond purchases as well as the remains of his "Operation Twist" strategy.
This is supposed to lower interest rates, which in turn is supposed to support the housing market and produce jobs.
However the principal effect of all this Fed activity is to support stock prices, commodity prices and other asset prices. That's why gold prices went on a tear after QE3 was announced, while interest rates have actually risen.
Traders have seen the limit of what the Fed can do to support the bond market and have begun to wonder whether the Fed's activities will bring inflation. The question is what will happen to the bond market once Fed purchases slow. If the Fed's efforts burst the bond bubble, $85 billion a month is nowhere near enough to begin to reflate it.
Meanwhile, in the real economy-the one where you and I live-- not much changes.
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Jim Rogers On QE3, Gold, Silver and Oil
The U.S. Federal Reserve is ready to launch a third round of quantitative easing, dubbed QE3 or QE Forever - but legendary investor Jim Rogers is shaking his head.
In fact, Rogers said repeating the same program the Fed has already attempted will make policymakers "look like fools again."
In an interview with CNBC before the Fed's announcement, the chairman of Rogers Holdings said he was skeptical that additional stimulus measures could have any meaningful effect on the U.S. economy. He added that despite his reservations, he expected the Fed to unveil QE3.
The iconic financier also lashed out at the new developments in Europe, including a move from Germany last week to funnel taxpayer cash into the European Central Bank's OMT program, their own version of quantitative easing. Rogers maintained they are not addressing the root of the problems plaguing the Eurozone area.
On Europe's move to implement a euro version of QE, Rogers said it affords the Western world "unanimity towards mutual destruction."
Any relief will be temporary, warned Rogers.
"We're all going to pay a horrible price for this in a year or two or three," he said.
As for why the Fed will continue its ineffective stance of zero to 0.25% interest rates through at least mid-2015, and the tossing good money after bad, Rogers advised the reasons are simple.
It's an election year and "Mr. Bernanke wants to keep his job."
That's why Rogers is getting defensive with commodities.
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What QE3 Means for Markets and the U.S. Economy
We finally know that a third round of quantitative easing, or QE3, is here, but it has left investors asking what it means long-term for the markets and the economy.
First, let's look at what QE3 is meant to do.
QE3 is meant to encourage economic growth and improve the U.S. employment picture.
On Sept. 7, the Department of Labor reported that only 96,000 jobs were created in August. Not only was that far below expectations, it was well under the 141,000 increase from July.
In addition, the underlying foundation is even weaker as income is down and more Americans are leaving the labor force. Of the jobs that are being created, most are poorly paying ones in the service sector.
From that, economic growth for the United States slowed to 1.7% in the second quarter, down from 4.1% in the final three months of last year.
This new QE3 - or QE Forever, since it has no expiration date - is the most intense program initiated by the Fed to goose the economy since the crisis.
Noted Julia Coronado, the head economist for North America at BNP Paribas and former Fed economist, "This is definitely a significant shift in FOMC policy. This is a very aggressive commitment to success on its mandates."
Here's what QE3 means for the markets and the U.S. economy.
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Stock Market Today: QE3 Sugar High Boosts These Stocks
The major headlines in the stock market today include the markets' reaction to QE3, consumer prices rising, and shaky retail sales.
- The QE3 rally climbs higher - After the Federal Reserve announced its latest stimulus measure, QE Forever, as some are calling it, the markets soared, all reaching multi-year highs. Commodities and financials in particular did well. Oil is approaching $100 a barrel, gold is nearing $1,800/oz., Bank of America (NYSE: BAC) has gained over 10% this week and JPMorgan Chase & Co. (NSYE: JPM) has now made up all its losses since the "London Whale Trade." The dollar as expected took a beating, falling to its lowest level since May, and the euro is now over $1.31. Yet, the question is whether QE3 will be a short-term or long-term rally. "It was a strong signal from the Fed and a very welcome move but we'll have to wait and see if this is more than a one or two-day wonder for the market," Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London told Bloomberg News. "All of this central-bank policy removes a degree of uncertainty that has been plaguing markets."
- Retail sales rise but outlook grim - The Commerce Department reported that retail sales increased 0.9% in August from a month earlier following a 0.6% gain in July. This was spurred by better auto and gasoline sales, but outside of those categories there was little good news. Excluding those two items, retail sales inched up 0.1% with weak electronic, clothing, and appliance sales. Core retail sales, which exclude automobiles, gasoline, or building materials fell 0.1% and is more closely related to consumer spending within the U.S gross domestic product calculation.
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QE3 Becomes QE Forever
Welcome to unlimited quantitative easing, or QE Forever.
The U.S. Federal Reserve goosed equities, Treasury yields, gold, silver, oil, platinum, palladium and investor sentiment on Thursday when it announced additional stimulus to spur economic growth.
The central bank said it will continue to buy mortgage-related debt and other securities until the job market shows significant signs of improvement so long as inflation remains tame.
"The market got what it wanted. Stocks immediately shot up," James Meyer, chief investment officer at Tower Bridge Advisers told Reuters.
In fact, the markets got more than expected.
As part of the Fed's new scheme, a marked difference from the first two rounds of QE, it will buy $40 billion of mortgage debt per month. Additionally, the Fed reiterated its stance of keeping interest rates at historic low levels, extending the time frame out until at least the middle of 2015.
"This is definitely a significant shift in FOMC policy," Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist told Bloomberg News.
Plus, the Fed said it would continue Operation Twist, its action to bring down long-term interest rates.
Collectively, the Fed moves will flood some $85 billion a month into the struggling U.S. economy for the rest of 2012.
The Fed has always set a determined amount of Fed purchases. This time, however, it let America know that easing will endure and no tightening will occur until confidence recovers.
That's why QE3 is a game-changing move for the U.S. economy.
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