To what extent will the expansion of the Fed's balance sheet, the QE3 and presumably more when this one doesn't work cascade around and lift other markets. Will the markets that have gone up the most so far like the grains and metals go up more than those markets that are relatively stagnant? How could this be profited from?

Rocky Humbert writes:

As one of the early believers in the market-moving potential of QE1, I suspect that my response to this inquiry may be surprising to some: I think that the idea that this qe3 and more will cascade and lift markets from here is presumptuous — and quite likely wrong. I posit with only a slight bit of quantitative evidence that we are approaching the point of diminishing marginal returns for QE. This is primarily because the move from 0 to 1Trillion was an infinite growth in the Fed's balance sheet. But the move from 3Trillion to 3.5Trillion is only a 16% increase. In other words, the Fed would need to engage in exponentially increasing amounts of QE to achieve the same effects. Additionally, the institutional memory of the market has now accepted the Chair's perception as conventional wisdom, so I think the half-life of QE effects are much shorter than previously. Lastly, I note that corn peaked on August 21st (the Fed largely telegraphed QE3 and announced it on September 13) and it has declined 11% since then. Oil peaked (so far) on 9/14 (the day after the fed announcement) and has declined about 8% since then. The Chair and I disagree on the underlying proposition. Hence, all is right with the world.





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4 Comments so far

  1. pacific SW on September 24, 2012 6:27 am

    mr humblebert is right, but for the wrong reasons.

    total credit in the bathtub (shadow + conventional) has been flat at the 2005 level since Q1 11, which incidentally is also since spy has been treading water more or less. whatever benyamin is blowing through one hole is leaking through the other.

    other than that, i have no concerns.

  2. Adam Sterling on September 24, 2012 8:20 am

    Gold: The Once and Future Money, by Nathan Lewis

    The author will be speaking about his book on October 4th at the New York Society of Security Analysts.

    Find out what happens after “QE To Infinity”.

    In the June 25th issue of Forbes magazine, Steve Forbes began his editorial by saying Gold: The Once and Future Money, by Nathan Lewis, is “Worth its weight in gold, and then some.” Shifting into his familiar refrain, subscribed to by many of us who read Daily Spec, Forbes goes on to say, “Economic disasters don’t come from flaws inherent in the free marketplace. They come from government policy mistakes.”

    Forbes’ two parallel observations, the first about Nathan Lewis’s book, which is concerned with the history of and potential future reestablishment of gold-backed money, and his second, how government intervention leads almost inevitably to market crises are a perfect pair.

    Here is the link to Steve Forbes’ editorial about Gold: The Once and Future Money:

    Every one of us knows a passionate gold bug that takes it as an article of faith that if only our money was backed by gold all the world’s problems would be solved and general happiness would prevail. The person we virtually never meet is the one who has spent years studying the underlying mechanics of precisely how such gold-backed systems have functioned in the past, and how, in terms of political and diplomatic policy, and central bank execution, such a gold-backed system of money could possibly re-emerge.

    Nathan Lewis is that person. Despite the fact that the underlying mechanics of a monetary system can seem awfully boring, Mr. Lewis keeps his narrative lively and moving forward when inserting a detailed description of how currency boards of nations with currencies pegged to each other have operated, do operate and can in the future. Those of us with backgrounds in economics find ourselves scratching our heads and, if we’re a brave, saying, “I thought I understood this; I didn’t.”

    Mr. Lewis does understand it. On August 2, he testified before the House Financial Services Committee, Subcommittee on Domestic Monetary Policy, chaired by Ron Paul. Tou can read his testimony here:

    I’ve found Nathan Lewis’ book so thought provoking, that I am eager to expand the discussion of ideas he eloquently presents. Thus I have arranged for the author to speak at the New York Society of Security Analysts on October 4th. While there is a fee to attend, to help the non-profit organization meet its costs, the first 40 registrants will receive a hardback copy of his book, Gold: The Once and Future Money.

    Here is the link to what I know will be an interesting event, and I hope to meet you there:

  3. Andre wallin on September 24, 2012 8:30 am

    The updated version of reminiscences with historical commentary is good. On kindle

  4. Craig Bowles on October 12, 2012 9:41 am

    Broadly speaking, economics still matter. These QEs support the lagging part of the economy and Japan has been able to do this for two-year periods before running into problems (Japan reached 2 years most recently in March and their economy has slipped since. We reached two years in September). The US lagging index began to outpace the coincident in April 2011 and became outpaced the leading index beginning September 2011. The leading index became the weakest in April 2012, so we’re fully inverted now. Gold has been rangebound since the middle of 2011, so that’s normal. The S&P hasn’t done much since Q1 2011, so that’s normal. The dollar hit a low April 2011, retested that summer, and has been stronger since.

    Recent data has the leading inflation index moving up sharply in August and September. The old Columbia Univ index is now outpacing the economy and only the lagging index is stronger.

    Stocks trend higher with the opposite setup. The only time you’d normally consider shorting stocks is with an inversion as we have now and a strong leading inflation index. Normally, the Fed Funds rate would be pushing above 3.6% (the combination of inflation and coincident growth rates). So, we have two out of three negative for stocks and that’s normally enough. 3 out of 3 would be the full negative setup.

    Economics still seem to be working for markets but you have to look at weekly charts to see it. Stocks normally do well after the lagging index has become the weakest until it turns back positive. Then gold becomes more favorable until the lagging index begins to outpace. Then bonds become more favorable as the indexes normally correct by having a recession. If the Fed acted like a gold standard, they’d tighten when the lagging index begins rising and never let the economy invert. The economy and markets would be less exciting but more stable. As it is, the Fed creates larger opportunities for speculators but makes it harder for industry to make large investments. That’s probably one reason we’ve become a service economy since it’s less capital intensive to run such businesses.


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