Don’t Think Today’s 219 Point Stock Market Rally Was a Good Thing

  • Written by David
  • November 4, 2010 at 6:53 pm
  • 1
  • As the US Federal Reserve continues to pump more money into the US economy in what is called ‘quantitative easing’ or more recently dub QE2, ‘risk assets’ (stocks, commodities etc) are being driven up in price (to multi-year highs) due to this new money being injected into the system.

    Note the article below where I share selected text illuminating the potential risks of this new QE2 $600 Million dollar injection announced by the Fed on Wednesday November 3, 2010 but widely anticipated for weeks.

    Doubts grow over wisdom of Ben Bernanke ‘super-put’

    http://www.telegraph.co.uk/finance/economics/8111153/Doubts-grow-over-wisdom-of-Ben-Bernanke-super-put.html

    “The early verdict is in on the US Federal Reserve’s $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc.”

    “it is the clearest warning shot to date that global investors will not tolerate Ben Bernanke’s openly-declared policy of generating inflation for much longer.

    Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.

    Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that ‘QE2′ was a done deal.

    The dollar plunged yet again. That may have been the Fed’s the unstated purpose. If so, Washington has angered the world’s rising powers and prompted a reaction with far-reaching strategic consequences.

    Li Deshui from Beijing’s Economic Commission said a string of Asian states share China’s “deep bitterness” over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy

    Brazil’s central bank chief Henrique Mereilles said the US move had created “excessive dollar liquidity which we are absorbing,” forcing his country to restrict inflows. Mexico’s finance minister warned of “more bubbles.”

    These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further “carry trade” inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system.”

    In London and Frankfurt the verdict was just as harsh. “In our view, this is one of the greatest policy mistakes in the Fed’s history,” said Toby Nangle from Baring Asset Management.

    Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.

    If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.”

    DGWA Conclusions:

    • Currency Wars
    • Trade Sanctions
    • Higher US Bond Rates
    • Continuing Falling Dollar
    • Repricing of Risk Based Assets (fancy speak for collapsing stock/commodity prices)

    Bottom line, US stock market indices are up for the wrong reasons, cheap money. Risk abounds.

    Thanks For Reading.

    ADDENDUM: as of November 5, 2010

    Global responses to Nov 3, 2010 Fed Action of $600MM QE2

    http://www.spiegel.de/international/business/0,1518,727457,00.html#ref=nlint
    Results of Fed Stimulus Could Be ’Horrendous’

    http://www.cnbc.com/id/40023267
    US Policy ‘Clueless’: German Finance Minister

    http://www.cnbc.com/id/40028362
    Half of Americans Have Lost Faith in the Fed: Survey

    http://www.telegraph.co.uk/finance/economics/8111153/Doubts-grow-over-wisdom
    -of-Ben-Bernanke-super-put.html

    Doubts grow over wisdom of Ben Bernanke ‘super-put’

    http://www.ft.com/cms/s/0/981ca8f4-e83e-11df-8995-00144feab49a.html
    Backlash against Fed’s $600bn easing

    This all in 24 hours! Whew..

 

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