We are going to see QE99!”

~ Marc Faber

Dear Mountaineers,

I warned you a few weeks ago that as interest rates started to rise, you should be on alert. The writing is on the wall. It makes you wonder sometimes how the stock markets, and their brokers on Wall Street, work. The following cartoon may give us the answer: behavioral finance I guess…

As investors worldwide weigh the impact of the Federal Reserve’s supposed reduction of monetary stimulus, stock markets keep falling. U.S. stocks fell, sending the Standard & Poor’s 500 Index to a nine-week low. Most notably, the Chinese stock market slipped into bear market mode amid concerns of a cash and credit crunch.

Last week, on June 19th, at the press conference of the latest Federal Reserve Open Market Committee meeting, Ben Bernanke promised that they would leave their program for quantitative easing (QE) in place and unchanged. However, in regard to the timing of tapering off, he also mentioned that if the US economy continues to improve as the Fed expects it to, QE spending would start tapering off later in the year, and under the current program would conclude in 2014.

While a lot of ‘mainstreamers’ had been expecting the possibility of tapering off in 2014, they were shocked to hear that it might begin this year already. A common expectation is that September will be the ‘beginning of the end’.

As mentioned, ever since Mr. Bernanke’s statement, financial markets have been on the way down. This move to the downside is exaggerated. And don’t worry, QE will not taper off or go away anytime soon. As Marc Faber stated in his typical and unique style, “We will see QE99.” In that same interview, he mentioned that believing the Fed was something akin to believing in Santa Claus.

Consider the following:

First of all, the economic data in the US has not been so very promising over the past three months. Why the markets or the Fed would expect a “continued economic recovery” with such unfailing certainty is a bit of a mystery to me.

Secondly, we have had several similar QE episodes over the past few years. This is not the first time that the Fed announced a tapering off process to begin in short order. And, it is not the first time that markets have gone into correction mode. In fact, the past corrections in the US stock market on such occasions ranged from 10% to 25%. After each one of these episodes, QE action was subsequently continued and even expanded as economic data (and the stock markets!) were not as strong as expected.

Where do we go from here? I expect the economic data to be very disappointing in the coming months. The weakness of fundamentals is now intensified by rising interest rates. We have entered serious ‘debt trap’ territory. Whether more QE will be able to calm things down once again is a hard thing to know for sure. In fall, I would not be surprised if we saw some very choppy waters for the financial markets.  


Frank Suess

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