Wednesday, November 3, 2010

Quickly, the News and QE2 and You

The news from the election front from last night: Republicans take control of House of Representatives, have a majority of roughly 60 seats. Democrats retained control of the Senate, though barely. 51 confirmed Democrats, enough to thwart any advances made by the newly-Republican House, guarantees the gridlock which will plunge the nation deeper into depression.

Obama, now neutered, leaves Thursday on a 10-day trip to India.

The FOMC kept rates unchanged at ZERO. The Fed did announce that it would be making additional purchases of Treasuries and other bonds to add to its already bloated balance sheet. Essentially, the Fed - though they won't say this in so many words - is sopping up more government debt and bad MBS from BofA, JP Morgan Chase, Citigroup and Wells Fargo.

The Fed announced that the size of what's known as QE2 (Quantitative Easing, Round 2) will be $600 billion, spread over eight months, or, additional purchases of $75 billion per month, beginning now and ending in June, 2011. All this amounts to, since the money will never actually be lent into circulation, is that the Fed is even more now the buyer of bad debts of last resort, the bag-holder for the broken banking community and bankrupt government.

Even if this money were to go into circulation, the effect of it, in simple terms, would be an additional $250 per month for every person in America. Now, for a family of four, that would be $1000, but the money will supposedly stop in June of next year. Were the Fed to actually do this, instead of playing their silly "we're so smart, you don't understand economics" game, it would actually be a short-term boost to the economy, but would not create a single job nor produce any desirable long-term result.

It would be similar to cash-for-clunkers or the $8000 home-buyer tax credit, a short-term boost, which basically steals sales from the future. In reality, when it ends (it probably won't) there will be a market correction, though, since it won't really end and isn't really stimulative since it's just journal entries and money changing hands between the banks and the Fed, the only real effect will be on the stock market, which is expected to rise because that's where the banks will invest their money.

Yes, it's a Ponzi scheme.

The market reaction to the major news that the Republican party had seized control of the House and the Fed's QE2: Not much.

Dow 11,215.13, +26.41 (0.24%)
NASDAQ 2,540.27, +6.75 (0.27%)
S&P 500 1,197.96, +4.39 (0.37%)
NYSE Composite 7,608.41, +26.27 (0.35%)
NASDAQ Volume 2,018,516,000.00
NYSE Volume 5,412,413,000.0

Advancing issues topped decliners, 3685-2692. There were 628 new highs to 84 new lows. Volume was a little more robust than normal, as evidence that the PPT is still operating behind the scenes appeared after the Fed announcement. Stocks slid quickly, then were boosted back to the positive. Apparently, some quants and hedge funds were unimpressed with the measly $600 billion pledged by the Fed, but the PPT quickly stepped in and quelled the uprising.

Commodites were little changed, though crude is getting a little out of hand, reaching $84.69 on a gain of 79 cents today. $90 per barrel appears to be the target, exacerbated by the weakening dollar. Gold was kept in check, down $8.70, to $1348.80, along with silver, a loser of 10 cents, to $24.84.

The Fed's QE2 is a curiosity to many, though to those in the know, it's nothing other than a temporary loan to the US economy to keep the powers that be in power for some time longer. It staves off the eventual economic collapse that many Americans are feeling first-hand and allows the government and the banks cover for more theft and stripping of middle class wealth.

Conventional wisdom says that commodities will rise if the currency is debased, though, since QE2 is not de facto currency debasement - a nice try, but no cigar - deflation will commence with renewed vigor, further depressing all asset classes outside of stocks, and that would include commodities and precious metals by definition.

Ergo, cash is once again king. Bookmark this post and check back in a few months to see if I'm not right. We will not have runaway inflation. The Fed is afraid of deflation and with good cause, but they are also too timid to actually confront it with blunt force, so they tip-toe towards it, throwing not enough money at it which the deflation monster merrily chomps upon, following the Fed down the primrose path to depression.

Cash is king again. Watch the dollar index rise.

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