Big Ben Discusses Another Round of Quantitative Easing

01/26/12 St. Louis, Missouri – Good day… And a Tub Thumpin’ Thursday to you! I wonder what I’ll talk about today…. Hmmmm… Could it be…. The Fed meeting? Oh, you are so smart! In case you missed this yesterday, because I’m sure the major media outlets couldn’t muster up enough intestinal fortitude to do it, but the Fed threw a cat among the pigeons yesterday… There are a lot of things I’m thinking about, this morning, so, this should be entertaining… For me at least!

OK… The Fed announced yesterday that they “expect short-term interest rates to stay close to zero at least through late 2014.” So much for the previous statement that rates would remain at current levels through mid-2013… But, 2014? And late at that! That’s just crazy, folks… But, as I expressed here many times over the years… We’re turning Japanese, yes, I really think so! Didn’t the Japanese cut rates to zero, pass stimulus after stimulus, and keep rates near zero for over a decade? Yes, they did… And… Haven’t we done close to the same thing, with our zero rates running for 6 years if they end in late 2014? Why, yes we have!

But, as I’ve always pointed out… The US consumer is different than the Japanese consumer… The Japanese are savers… We are spenders… But… As I pointed out to a group of “big guys” last week, where someone thought deflation for that long a time was OK… Yes, it does keep prices down, but you, me and the guy down the street know that prices aren’t going anywhere. And if that happens, no spending will occur, and that will shut down the economy, just like it has in Japan!

So… You should have seen the euro (EUR) lead the currencies higher along with gold and silver when the Fed made that announcement yesterday… The overnight markets also decided that the Fed is going in the wrong direction, and to the woodshed.

The other thing that gives me reason to pound on my chest this morning, is that Bernanke said that he was laying the groundwork for a third round of large-scale asset purchases (I told you they wouldn’t call it quantitative easing) should unemployment remain higher than the Fed Reserve would like, while inflation falls below a newly-established “target”… He went on to say, “The FOMC recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation.”

Currencies and gold (and silver) weren’t the only beneficiaries of this statement… US stocks rallied too.

So… Once again, my confusion gets some clarity, for I had said originally that the next round of QE would come last fall, but the Fed decided that it wasn’t time yet… So, then I said it would come about the time I get back from spring training… And it looks like I’ll be bang on that…

Not that I want any accolades. This is bad stuff, folks… This Quantitative Easing or QE… Not bad for stocks, bonds, currencies, and metals… But bad for us, and US citizens… One day, all the money supply that the first two rounds of QE generated ($2.4 trillion) and the next round of “X”, are going to be unleashed on the economy… And you want to talk about the velocity of money? This will be warp speed!

Now… Onto other things… You know the baby steps of stabilization that I’ve talked about for the Eurozone lately? Well… What if I told you that it just so happens to have coincided with a HUGE increase in the money supply here in the US? And what if I told you that $103 billion seems to have been sent in swaps to the Eurozone? Well… I do believe that’s what’s happened… So, when it comes down to it, you and I are bailing out the Eurozone… And, I can’t imagine that $103 billion is going to be “it”… More dollars will be printed, and shipped…

And, now I want to talk about something that I found on the BLS website the other day… Read it first, and then I’ll have comments…

Effective with the release of The Employment Situation for January 2012 scheduled for February 3, 2012, population controls that reflect the results of Census 2010 will be used in the monthly household survey estimation process. Historical data will not be revised to incorporate the new controls; consequently, household survey data for January 2012 will not be directly comparable with that for December 2011 or earlier periods. A table showing the effects of the new controls on the major labor force series will be included in the January 2012 release.

OK… Clear as mud, right? Well… More confusion is in store for us, folks… From here on out, we won’t have a previous reading to compare the data with… Reading my friend, Bill Bonner, in The Daily Reckoning yesterday, he addressed what’s going on with data here in the US. Here’s a snippet of Bill, first quoting Bloomberg…

“The adjustment process ‘has been knocked out of whack by the financial crisis,’ Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.”

In effect, the models are over-compensating…trying to make sense of the big collapse of ’08-’09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular.

But Goldman’s economists estimate that unemployment will average 8.5% this year — almost unchanged from last year. That is not a recovery.

Thanks Bill!

Now back to the Fed… O’ brother where art thou? Remember all last year, the Fed kept saying that they expected stronger growth in the fourth quarter? I wonder where that thought went… Now “The Federal Reserve downgraded its outlook for economic growth this year”… Really?

Remember what I said at the top of the year? I said that the year had already started with glowing forecasts for the economy in 2012, but by the time I headed to spring training, those glowing forecasts would be fading… Well, the Fed didn’t even wait until pitchers and catchers report next month to begin downgrading those forecasts…

OK… The Greek talks with private creditors resumed this morning, after being suspended yesterday… I can’t believe an agreement hasn’t been ironed out by now (recall I thought it would be done last weekend)… Just goes to show you that when you have debt, you are not in a position to negotiate… I hope US lawmakers are paying attention here, because if they don’t, this is the same thing we’ll be going through at some time in the future.

The Aussie dollar (AUD) has pushed back above $1.06… I’m told by my charts friend that the next resistance level in Aussie dollars isn’t until $1.0760… So at $1.0675, where it is right now, it’s still got room to run without resistance… The Aussie dollar, even with the RBA doing their best imitation of Alan Greenspan, still enjoys a very strong positive interest rate differential and, with the Fed’s latest announcement, that rate differential will remain for some time, eh?

But… More than the positive interest rate differential, what the Fed’s announcement does is open the playing field for the low rate currencies around the world. Specifically, the Asian currencies. I’ve said for some time now that the Asian currencies were the place to be this year, and as long as interest rates don’t in the way of comparisons, the Asian currencies should be able to win a comparison to the dollar…

And, when the euro goes on a rally like yesterday and overnight, the currencies like Norway and Sweden get to have moon shot rallies!

And then gold… OMG! What a rally! And then push that further, with the rally that silver had too! Gold and silver are both up this morning, too… Not like yesterday when gold added nearly $40 and silver $1.20… But still up, good to see that profit taking or price manipulators haven’t entered the market. Speaking of the price manipulators… A reader asked me yesterday about if the new commodities exchange that’s starting in Asia is going to help gold and silver; and I said that as long as the price manipulators aren’t allowed there, yes!

A friend of mine, (thanks, Dennis) sent me a note from a guy that does numbers, and I found one of the items to play well with the Fed announcement yesterday… OK, let me set this up for you… The Fed announces that interest rates will remain near zero for more than two more years… It’s more than inflation they want, folks… Consider this:

The average interest rate paid on the $15.2 trillion of debt that the USA has outstanding is 2.826% as of 12/31/11. Every 1% increase in the average interest rate paid by the US government would add $152 billion of additional cost per year, equal to $4,820 of additional interest expense per second for the entire year (source: Treasury Department)

So… Now you know the rest of the story…

Then there was this… I’ve quoted James Turk many times over the years… Mr. Turk is the foremost expert on the history of money and the role of gold in our economy. James thinks that hyper-inflation is coming down the road. This leads him to forecast an eventual price for gold of $8,000 or more. He sees mining companies as a good option now, as costs are down relative to revenues that can be realized (given the price of gold at $1,600 and growing).

A Bull Market on most mining stocks in 2012 will create great profit opportunities. Silver could likely outperform gold in 2012 as the historical silver/gold ratio is 16:1 and this ratio is currently out-of-line at its current ratio of 50:1. This ratio is likely to be closer to 30:1 by the end of 2012. Gold is money as it was chosen by the people some 5000 years ago as money.

Yes… All good thoughts, and the hyperinflation he’s talking about is the warp speed velocity of money, when the (to be) 3 rounds of QE/money printing are unleashed on the economy… When that is… Is the question of the day, but, when it hits, I don’t think anyone will have time to react, which is why I truly believe you have inflation fighters, like gold and silver, in your portfolio now! That way, you won’t have to be the guy that remembers he needs new tires before the winter snow begins, but keeps putting buying the tires off, and then one day he wakes up to a foot of snow on the ground… Now, he has to try to get to a tire store, with every other procrastinator that put off buying new tires, and now he’ll have to pay whatever price the tire dealer chooses to charge him… Don’t be that guy!

To recap… The FOMC meeting threw a cat among the pigeons yesterday, by not only announcing that the Fed Funds rate would remain near zero until late 2014, but also that more QE is coming should unemployment remain sticky… So, you might as well oil up the printing press, Ben, unemployment is going to remain sticky! The currencies, metals and stocks all rallied on the news, and have continued those rallies in the overnight markets.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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