I’ve had just about enough of Ben Bernanke.
I’m not a reflexive Fed hater. As I’ve stated on this blog before, I’m a monatarist, and believe that a certain amount of money printing can sometimes be a good thing. But I called “uncle” on extraordinary money printing back in April 2011. Since then we have not seen absurd inflation, but we’ve seen it. From a money supply perspective, I don’t really see the need for massive new QE. The M3 money supply growth rate has been mildly positive and stable since some time in 2011.
But I would not be posting if QE3 was just more QE2. What bugs me about QE3 is not so much that they’re doing it, but what they’re doing. I’m somewhat bothered by the magnitude of QE3, and very much bothered by the emphasis on purchasing mortgage securities.
One lonely dissenting Fed voice, Richmond Federal Reserve President Lacker:
Finally, I strongly opposed purchasing additional agency mortgage-backed securities. These purchases are intended to reduce borrowing rates for conforming home mortgages. Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, “Government decisions to influence the allocation of credit are the province of the fiscal authorities.”
And that’s what bugs me about QE3. When everything was going to hell in a handbasket, if you bought into the concept of TARP, it made sense to try to stop the bleeding in housing. More foreclosures meant more bank failures which would mean monumental contractions in the money supply having a run-away effect that would inflict untold collateral damage on the economy. (I know a lot of people don’t buy this theory, but bear with me.)
But unless The Bernanke sees future spiraling deflation in housing, there’s really no justification for the continued emphasis on housing. The housing market crashed because people put too much (borrowed) money into real estate. With things being relatively stable now, why on earth would it be a good idea to further inflate housing prices and encourage individuals to take on more household debt? This is beyond absurdity. If they are going with the “wealth effect” theory to goose-up consumer spending, they are very explicitly re-inflating the original bubble, and even if “sucessful” their efforts will have profound unintended consequences.
Between inflated housing, fuel, and food, discretionary consumer spending will shrivel, not rise. Inflated housing prices means stifled household creation, meaning more basement-dwelling 20 and 30 somethings. Lower savings rates with corresponding minimal capital formation means fewer small business start-ups. Increased disparities between rich and poor.
Charts and a little more commentary below the fold…
Short term outlook (–a few weeks to a few months):
I am by no means a gold bug, but in the short term I expect gold to outperform the broad stock market. Various S&P indicators I follow show it to be ripe for at least some consolidation if not a healthy pull-back. Gold on the other hand, looks to be breaking out of a long-term consolidation pattern.
Gold as represented by the GLD fund:
If, however, you are awaiting the Ron Paul monetary apocalypse, I hope clinging to those gold coins keeps you warm at night and fill your belly.
The dollar index is not horrible… right now. (100 week moving averages added to charts from here on out for consistency and simplicity.)
Oil — mostly just volatile for the last two years.
Oil-to-GLD ratio — Oil priced in terms of gold is actually trending down somewhat. I interpret that as underlying economic weakness with a modest inflation kicker.
CRB index-to-GLD — (The CRB is a broad index of commodities, about a third of which is petroleum products). Commodities priced in gold show a similar pattern to just-oil: