Monday, March 7, 2011

Is QE3 The Next Black Swan?

One has to wonder.  I thought these folks were smarter than this:

"Arlington, Va. (CNNMoney) -- If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.

Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.

"If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference."

My Take:

Please hold on a sec....HAHAHAHAHA!  Let me stop laughing first before I go on. 

Ok, on a serious note:

Let me start by taking a look at the bond markets since QE2 was announced in early November.   Let's take a refresher course first.   QE2 was implemented in in order to keep interest rates low.  This was intended to help stabilize the housing market which would then help prop up the economy.

Let's look at the 10 year since and see how that worked out:

Oh it worked all right...In the opposite direction!!!  As you can see above, bonds have tanked since QE2 was announced.  We are up over a full percentage point in yield since QE2's inception. 

So much for that idea!

QE3=Lower Gas?

So let me get this straight. Lockhart believes that QE3 will help keep gas prices lower?

Let's take a look at the dollar and crude oil since QE2 was announced:

Hers is the dollar first:

Now let's take a look at crude:

Take Continued:

As you can see above, the dollar tanked on the original QE2 news in early November, and we are once again about to retest the lows that we saw when it was first implemented. 

This price action is pathetic considering the fact that we have seen total geopolitical chaos in the last month.  The dollar is supposed to be the "safe haven" during times of crisis like these.  Not anymore I guess!

Now let's take a look at oil.  Oil stood at $80 when QE2 got started.  Crude responded to the news by rising up to $90 in the first month following the Fed's announcement.  Crude has done nothing but move higher ever since.  It now sits at $105 a barrel.  I will give the Fed a pass on the recent spike due to the Middle East chaos.  However, minus these events, oil still rose 20% following QE.

The Bottom Line

A quick question for Lockhart.  How does weakening our currency via QE3 help lower the price of oil?  Wouldn't it have the opposite effect?   How could you not come to this conclusion?

I mean look at what has happened to food prices since the announcement of QE2!  In case you have been hiding under a bridge they are soaring!!! In fact, food prices have passed the highs seen back in 2008!!!

This rise in the cost of food thanks to your inflationary policies are why we are seeing the Middle East blow up right before our very eyes.   People don't risk their lives fighting well armed government armies with rocks unless they have nothing to lose because they are starving, broke, and desperate.

Everyday I read things that absolutely blow my mind.  The stupidity and greed we are witnessing at the Federal Reserve is just breathtaking.

Mark my word...This is all going to come home to roost one day, and we may be very well seeing it happen right now.  The market looks sick but it's too early to call this a correction.

The market is trading on oil prices for now.  I am curious to see what the market does once(or should I say if?) things start to settle down in the Middle East.  I thought it was interesting that the market didn't rally more at the end of the day when crude prices slid back a tad near the end of the session.

The bulls tried to rally it back, and the DOW at one point was only down 49 points before the sellers took over into the close.  We ended the session down 80 points.

It will be interesting to see if this geopolitical chaos continues into April/May which is when the Fed will begin contemplating the end of QE in June.  This could be a potential disaster for the Fed because oil could very well rise into the $150's by then if the Arab world remains in tatters.

The Fed at that point may very well feel that they have no choice but to press the QE3 button which means they will be playing with some serious fire.

They will have no idea how the markets would react to such a move.  The dollar could get destroyed by the currency traders on such a policy decision.  This would then force oil prices even higher.

Will this be the Black Swan?  Probably not because Black Swans usually come out of left field.  Is the Middle Eastern revolution developing into a Black Swan?  This could very well be because NO ONE saw this coming, and things seem to be getting worse by the second over there. 

Enjoy the rest of winter folks.  Things are going to be heating up faster than usual this spring.  Fill up your oil tanks as winter ends before the fun starts.  This is going to get interesting.


getyourselfconnected said...

One trick ponies at the FED. Bunch of psychos.

Babbaloo said...

Here is an argument for QE ad infinitum: We are already past the point where stopping QE will tank the economy. Such is a liquidity trap.

Now, to be sure, I am not arguing for QE. I am a saver and prefer QE to stop now. But some of the money hawks have already predicted QE forever. There may be something to those predictions.

For sure, that will eventually cause massive inflation. But how will the government react? How will the idiots, mainly democrats, we have seen recently on TV saying no spending cuts can be made handle inflation? Price controls and other interventions?

Lastly, for people who follow the blogosphere, we see just as many people blaming everyone and anyone but government for this fiasco. Since those fools vote, there is not telling how this will end. Not well, methinks.

Jeff said...


Well Said. The Fed is damned if they don't QE and damned if they do.

Fixing the problems=political suicide so I can't count on Congress to fix it either.

Me thinks you are right. I don't see how this ends well. It's going to take a serious crisis before we act. Hopefully by then it's not too late.

Herb said...

QEIII is definitely going to happen...but oil prices is just a smoke screen to get more money into the hands of the banksters and try and keep the stock market from crashing.

Jeff said...


I agree.

Worry about inflation if QE3 comes.

YOu think oil is bad now wait till the dollar gets toasted!