“If Ben goes wacko in Jacko, could stocks spike like the Grand Teton?” – Peter Eavis, The Wall Street Journal
FX Trading – To QE2 or Not to QE2, That is the Question …
Dong, dong, dong….as the hour of Big Ben’s speech this morning from Jackson Hole approaches, bets are being lined up as whether Mr. Bernanke will indeed rev up his helicopter for yet another strategic drop…
Action: Mr. Bernanke says yes, the Fed will embark on quantitative easing #2 (QE2).
1. The dollar get’s whacked hard, as it did when the Fed embarked on QE1 back in March of 2009, thanks to falling US yield differential and larger supply of dollars on the market
2. Stocks rally sharply on all the new liquidity that will be used to bid up financial assets, knowing very little will likely leak out into the real economy anytime soon.
Reaction #2: My gosh! Is it really that dire? We really are in the soup. QE1 didn’t work, and that was with the support of a massive fiscal stimulus to boot. What’s the incentive to borrow and lend no matter how many more bank reserves are created. It’s not real money until it gets into the real economy. Thus, this move will not keep us from tipping into deflation, which will only push consumers deeper into their respective shells and provide yet another disincentive for companies to invest or hire new employees.
1. Stocks tumble on the realization current earnings expectations are way out of whack.
2. Dollar support on the good old risk aversion trade.
Of course, Mr. Bernanke could say that yes we still have QE2 as ammunition in our arsenal, but we see no reason to use it now. Interest rates are already low, the credit market is functioning just fine, though the latest data has been soft — we believe things are improving globally and there is very little chance of a double-dip recession. Germany is rebounding nicely and though China is slowing a bit, there is still brisk demand flowing from Asia and other emerging markets. Japan is hurting, but we expect new easing measures there will help boost growth and support the global recovery. Jobs growth has been disappointing, but recently we have witnessed job growth at the state level for the first time in a while, we think this is proof both monetary and fiscal policy, which always work with a lag, are now finally starting to…..
…..read pages 3 – 4 HERE