Kicking the Barrel Down the Road With Steel Toe Boots: Is a Forced QE3 Imminent?


Up until this week, there were several assumptions in the financial world that were in place for a while. The first one is that China will continue to grow, and will underpin growth for the rest of the world. The second assumption is that the US is in a recovery, and that the US Dollar can be used as a safe haven for global issues. The third assumption is that with respect to the Euro issues, bailouts and austerity would be enough to fix the crises. All three of these assumptions are being called into question this week, with the possibility that they may have been wrong the whole time.

China is showing signs of weakness in their manufacturing (1)(2), in their currency (11) and with their stimulus (2). There was a surprise interest rate cut recently (2) which underscores the weakness. Growth may continue to be good in China, but is it enough to keep sinking ships afloat?

The US recovery is a non-starter. The numbers were temporarily positive earlier in the year, but the truth is that the economic growth has been slow. The US has been struggling since 2007, and the unemployment numbers remain very high. (10) (13) Other indicators are not showing great strength either – like the manufacturing and housing sectors. (1) (11) (13)

Lastly, the Euro is unraveling rather quickly. Greece now has calculated odds of leaving the Eurozone, which was unheard of months ago. (15) Greek banks are having runs on them, as are the Spanish banks. (8) (12) The panic is likely to spread to Portugal, who recently has applied capital to shore up its banks.(7)  German yields are now negative, which makes no sense at all.(5) If you are going to invest money, you would have to PAY the interest to invest it rather than receive the interest? Is this being done as a flight to safety? Why not just keep money in cash – your return is higher, safer and more liquid. This is clearly a sign of panic and shouldn’t be taken lightly. There are also increased calls for Euro wide control of fiscal and economic policy for all of the countries. (3)(4)(6). Is this a sign of desperation to try to control the uncontrollable? These signals indicate activity going above and beyond austerity measures, and there is no guarantee of success.

Given all of this uncertainty, will Fed intervention or a worldwide bailout be enacted using all of the central banks – in essence a forced QE3? It has been done before (14), and it can happen again (4)(6)(9) – the question is when and how.

Sources:

1)                  http://www.bloomberg.com/news/2012-06-04/german-stocks-decline-automakers-fall-on-china-slowdown.html

2)                  http://www.bloomberg.com/news/2012-06-07/china-cuts-interest-rates-for-first-time-since-2008.html

3)                  http://www.reuters.com/article/2012/06/03/us-eurozone-union-idUSBRE85207J20120603

4)                  http://www.washingtonpost.com/politics/canadian-finance-minister-says-group-of-7-major-nations-will-hold-emergency-talks-on-europe/2012/06/04/gJQAoJe9DV_story.html

5)                  http://www.bloomberg.com/news/2012-06-02/german-2-year-yield-drops-below-zero-as-crisis-deepens.html

6)                  http://www.nytimes.com/2012/06/05/world/europe/germany-open-to-deal-on-pooling-euro-debt-with-limits.html?pagewanted=2&_r=1

7)                  http://www.bloomberg.com/news/2012-06-05/bank-coordination-pcaob-lawsuits-portugal-banks-compliance.html

8)                  http://www.bloomberg.com/news/2012-06-04/spain-bankers-backing-eu-aid-highlight-doubts-on-state-finances.html

9)                  http://www.bloomberg.com/news/2012-06-06/finnish-leader-says-u-s-worried-about-europe-banks.html

10)              http://www.csmonitor.com/USA/2012/0601/Poor-unemployment-report-points-to-troubled-US-economy/%28page%29/2

11)              http://www.bloomberg.com/news/2012-05-18/asian-currencies-fall-most-since-november-as-europe-risks-mount.html

12)              http://www.nytimes.com/2012/05/21/business/global/europes-worst-fear-spain-and-greece-spiral-down-together.html

13)              http://www.bloomberg.com/news/2012-06-07/bernanke-sees-risks-to-economy-from-europe-to-u-s-budget.html

14)              http://www.bloomberg.com/news/2012-05-21/fed-says-qe-reduced-yields-on-more-than-targeted-debt.html

15)              http://www.bloomberg.com/news/2012-06-04/s-p-sees-at-least-1-in-3-chance-of-greece-exit-in-coming-months.html

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

12 Responses to Kicking the Barrel Down the Road With Steel Toe Boots: Is a Forced QE3 Imminent?

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