There's an old cartoon of three cavemen out in the rain. Bul is jumping up and down screaming at the weather, and the second caveman says to the third: “Everybody hates this weather, but Bul is the only one that tries to do something about it.” Welcome to QE2.
The Fed, in its infinite wisdom, is going Bul. It decided that it has to perform a massive inflationary program, a second round of quantitative easing (QE2). The Fed has announced its intention to buy up to $600 billion in Treasuries to force cash into the bond and stock market, which would increase the wealth effect, allowing the wealthy to buy more expensive things (like Coach
(COH) handbags). There should be some trickle-down effect, similar to a drizzle in caveman terms.
David Stockman, previously the budget director under Ronald Reagan, had an enlightening article last week. (See Our Failed National Economy
). He goes through all the possible choices to reduce government spending significantly and concludes it will be impossible. Regretfully, I agree.
The real problem with QE2 is the run-up in commodity prices since the QE2 program was hinted at starting in August. You don’t eat or burn gold or silver. Look at the following charts of corn, soybeans, and crude oil.CornSoybeans
These are the commodities you eat or use, not things you can bury in the ground or put in safe deposit boxes. QE2 is in the process of killing the poor and middle class via food and energy, while providing virtually no other benefit to these people (excluding, perhaps, farmers). The Minyanville mantra is confirmed: Inflation in the things you must have, deflation in flat screen TVs.
Dr. Frankenanke (Ben Bernanke, head of the Fed) is conducting a macroeconomic experiment. Experimental economics is a fun, little field where college students play in games where they can make a few dollars gaming the system. This allows their professor to write up a paper describing the game and its results, and, for the professors, progress to tenure. All in all, a harmless activity.
All in all, QE2 is no harmless event. It's a $600 billion gambit that the rest of the world is already protesting and that treats average American like subprime, even though they saved money, never overleveraged, gave charitably, and conducted themselves the way rational people should. This is the ideological basis of the Tea Party, and the new Tea Party members of the House will be realizing this soon, especially after Stockman’s realities hit them after a few weeks in Congress.
The Tea Partiers believe they were handed a hammer to change Washington, and they're looking for nails. As food and energy inflation starts to hit the middle class, other than discretionary spending, the next obvious nail is going to be the Fed, and they're going to have the country and the rest of the world behind them! Nonstop committee hearings are likely for Dr. Frankenanke. He might as well get a cot in the Capitol, but ultimately there will be but one simple conclusion for the Tea Party. It’s one that fits easily on a protest sign, and one that is easily understood: Impeach Bernanke.
Impeaching the Fed won’t be easy. It was designed to be very difficult, but a Dr. Frankenanke was never expected. Nevertheless, I think the Tea Partiers will give it a try.
Bernanke will rightly try to resist any attempt to compromise the integrity of the Fed. Can President Obama or anybody actually pressure him to stop QE2 or quit? If he persists, the gap between the Haves and the Have-nots will be wider than ever. If he folds under pressure and cuts QE2, the dollar rockets upward, gold, silver, oil, and the market crash. Either way, he has an excellent chance of catching Greenspan as the worst Fed head ever.
In a macro world where stock picking doesn’t matter because everything seems to be highly positively correlated, it helps to use these types of forward-looking scenarios, because it helps one to be ready to analyze events as they occur, and adjust investing strategy accordingly.
If an attack on the Fed occurs in 2011, the volatility potential is immense. You could hedge now by buying VXX
, but right now that seems a bit too early. Now that the election is finally over, politics moved to the backseat, the Fed is driving in the front seat, but ultimately 2011 looms in the windshield.
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