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QE2 and the Commodities That Cause Riots


Commodity markets reacted so strongly to QE2 because a number of global weather problems reduced harvest forecasts and, with global food stockpiles already tight, grain prices had a running start before QE2 even started.


Here are a few jokes to start the week off right:

A guy is traveling through the back roads of Tennessee, and he drives by a farm with a sign that says, Talking Dog, $10. Intrigued, the guy stops and asks the farmer sitting on the front porch about the dog. The farmer says that he's around back, go check him out.

The guy goes out back and sees the dog. He asks, "You can talk?" The dog answers, "Yes, I can". The guy can't believe it. "Tell me your story." The dog starts talking. "Early on as a puppy I could understand people and talk back to them. The CIA found out about me and recruited me to be a spy. I sat in meetings and nobody ever paid attention to me. I caught a bunch of spies, got loads of medals, but in dog years I was getting old and the travel was too much. I retired from the CIA and worked for the TSA at the airport for a couple more years, but now I am fully retired. I got married, we've had a bunch of puppies, and now I'm just enjoying life"

The guy is astounded. He can't believe it. He goes back to the farmer and says, "I have to own this dog, but why is he so cheap?" The farmer says, "He's a liar, he never did any of that crap".

Next joke:

Lost dog -- only three legs, blind in left eye, right ear missing, recently castrated, and answers to the name "Lucky."

Final joke: Quantitative Easing 2 (QE2)

Last Thursday, Ben Bernanke gave a speech at an FDIC forum. Here's a quote courtesy of MarketWatch:

Federal Reserve Board Chairman Ben Bernanke said Thursday that a controversial $600 billion bond buying plan has contributed to a stronger stock market. "Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program," Bernanke said at a Federal Deposit Insurance Corp. forum on small businesses. "A stronger economy helps small businesses more than larger businesses. Interest rates are higher but that's mostly because the news is better. It has responded to a stronger economy and better expectations."

As they say in bridge, let's go back and review the bidding. The day after Quantitative Easing 2 (QE2) was announced on November 3, 2010, Ben Bernanke wrote an Op-Ed piece for the Washington Post explaining the rationale and expected benefits of QE2.

The most interesting paragraph is below:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

According to Bernanke, the most obvious benefit of QE2 was supposed to be a lowering of mortgage rates. This obviously would help the housing market. Let's look at mortgage rates for the past three months since QE2 was announced. See the chart below:

(Chart courtesy of

Next, he said corporate borrowing rates should be lower because Treasury rates will be lower. Here's the 10-Year Treasury chart (lower bond prices equal higher rates) for the past three months:

Finally, the stock market will go up, making everybody who owns stocks happier. The three-month chart is below:

It's rather obvious that forcing cash out of Treasuries and into other assets is working. The stock market chart proves that. However, mortgage rates are up and Treasury notes have sold off raising those rates. At first glance, this seems odd. If the Fed is buying on average $50 billion of Treasuries a week, why are rates going up? Why didn't Bernanke mention that rates were going up instead of down last week?

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