Home > Uncategorized > 2012/08/02: QE is the Opiate of the Perma-Bulls part 1

2012/08/02: QE is the Opiate of the Perma-Bulls part 1

© 2012 ROHR International, Inc. All International rights reserved.

Bernanke busts politicians with QE ‘pass’.  After so many folks insisted that the FOMC ‘must’ provide further quantitative easing in yesterday’s announcement, it was a bit of a bust for there to be no indication of immediate action. So why was it that the equities held up so well in spite of the lack of this allegedly essential move by the Fed? The September S&P 500 future managed to hold no worse than the 1,370 Tolerance of the recent 1,375 short-term Double Top.

The first answer might be within the FOMC statement. While there was no explicit immediate QE action, it did allude to the fact that “…economic activity decelerated somewhat over the first half of this year.” Another subtle yet meaningful change later on in the statement was the inclusion of the term “will” regarding the additional accommodation that will be provided if economic and financial developments continue to weaken.

Yet, on balance, the real support for the equities likely came from another source: and ECB press conference where President Draghi is supposed to be backing up the commitment from late last week on defending the euro currency project at all costs. That will undoubtedly be a very interesting affair.

However, even if he does commit some sort of extended support over the current protestations of the Bundesbank, we still have our basic question about all of this liquidity provision. Does crisis mitigation actually amount to any meaningful growth restoration?


 The fact is that the current economic weakness is not due to monetary tightness of any sort. It is more so a creature of political and regulatory dysfunction. And those hard decisions to address the issues do not appear to be any closer in either Europe or the US.

And while we will have much more to say about the global context, there was an excellent Short View column by James Mackintosh on three key dangers that the equities are ignoring at present… much like they ignored the US debt ceiling debate last year until it was too late. Those are the imminent bankruptcy of Greece, US fiscal cliff, and the extent of the Chinese slowdown. The online version of that column at ft.com also contains a video that includes graphs and additional discussion beyond the short analysis in the column.

The bottom line is that all the QE in the world does not necessarily amount to much that will cure what ails the real economy without significant fixes for the problems that amount to a breakdown of the “monetary policy transmission mechanism.” We alluded previous to the high performance engine revved up yet going nowhere, because the ‘transmission’ was broken. At least in Europe Signore Draghi is combatting outside sentiment that is skeptical of weak sister Euro-zone sovereign bonds. The lack of action in the US is much more a self-inflicted wound.

However, that does not make the problem any less of a risk for the global economy. Recent economic data suggests the negative psychology from Washington DC is affecting consumer confidence as well as business ‘animal spirits.’ Unless something changes soon, it will be a self-fulfilling bout of further weakness. So even if Mario Draghi continues supportive actions, there is a real question over whether that changes anything in weak global economies unless the political class gets its act together.  

Thanks for your interest.


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