The S&P500 jumped on the last day of the week based on a not so impressive announcement by the ECB which will make “sterilized” bond peripheral bond purchases if—and that’s a big if—significant conditions are met by the offending states. For example, the government of Spain would essentially need to hand over control of its fiscal policy to the elites of Europe. While certainly possible, it’s far from certain that this will happen in Spain, and then Italy, and finally perhaps even in France. But don’t tell that to the equity markets, because the surge on Friday implies that stock investors are betting that all will now be well in Europe.
Meanwhile, almost all of the world’s economies continue to slow down, with Germany and Australia joining the “contraction” party. Corporate profits in the S&P are actually looking like they will CONTRACT for the first time in three years. And sales are definitely falling.
And yet, US equity markets are near all-time highs.
But so are precious metal prices. Copper prices are bouncing. Oil and gasoline prices are at or near all-time highs. Food, specifically grain, prices are also near all-time highs.
And official measures of inflation are near the high-end of their recent ranges, whether it’s CPI, core CPI, the 10 year breakeven rate, or the 5 year breakeven rate. Even home prices are looking like they’ve bottomed and slowly beginning to rise.
There is certainly little evidence that prices are stagnating, much less deflating.
So what’s the Federal Reserve about to announce….at it’s upcoming FOMC meeting next week?
The consensus among experts is that the Fed is on the verge of launching QE3.
Because headline unemployment is not falling fast enough.
The problem is two-fold. First, when so many asset prices are already near all-time highs, launching another round of money printing (yes, electronically, not literally) is certain to shove these already lofty prices MUCH HIGHER.
So prepare for $4.50 or even $5.00 gasoline. Prepare for food prices to zoom even higher, and not just for Americans, but for the rest of the world, much of which is already starving! Prepare for housing rents to jump even higher; prepare for all sorts of daily “need to buy” items to rise in price.
Second, there is a growing body of evidence that the Fed’s QE programs DON’T REALLY WORK. Columbia University professor Michael Woodford presented this argument to the central bankers of the world at the most recent Jackson Hole conference. And if so—and the empirical data seems to strongly support this argument—then doing more of the same (more QE) will once again FAIL to accomplish the goal of kick-starting the economy to generate escape velocity.
So this is what it’s come down to. Later this week, if the Fed launches another round of QE, be prepared to see the already squeezed middle class begin to suffer even more….with higher gas, heating fuel, grocery and rent bills.
All the while, unemployment will not get better—the same way it didn’t get better will all the prior monetary programs. As a result, the middle class will NOT enjoy greater incomes to offset the greater living costs created by the Fed.
Why Wall Street, of course! The banks, the investment banks, the insurance industry and others in finance—the folks who the Federal Reserve literally reports to—will win….once again.
At some point this insanity will end. Let’s hope there’s a nation still standing when this lunacy does finally end.