Posted on 04/18/2011 1:05:08 PM PDT by SeekAndFind
Could the financial markets be heading for a June swoon?
The answer likely hinges on what happens after the Federal Reserve's $600 billion effort to boost the economy expires. Some investors warn that the end of the program, known as QE2, will upend the stock market and push other markets in unexpected directions.
Under QE2, the Fed buys Treasurys from investors who can then put the money in stocks and other investments. Economists call it quantitative easing, and it is the second time the Fed has used the tactic.
Since last August, when Fed Chairman Ben Bernanke outlined the plan, the Standard & Poor's 500 index has gained 26 percent. Many also say it's partly to blame for rising commodity prices on everything from silver to cotton.
"It's the most important factor that explains markets the way they are now," says David Rolley, co-head of global fixed income at the fund manager Loomis Sayles. "So the most important question is what happens when QE2 stops?"
Ask investors and you get a variety of opinions. Bill Gross, manager of the world's largest mutual fund at Pimco, fears the worst. Take away the largest buyer of Treasurys and, he says, their prices are likely to fall and long-term interest rates likely to rise. That could hurt the economic recovery, and it's one reason his fund has dropped nearly all of its Treasury debt.
Other investors and economists, including those at Goldman Sachs, believe QE2 will expire without a stir. A top Fed official agrees.
"I wouldn't expect to see a financial market reaction to the termination of that program," said Janet Yellen, vice chair of the Fed's Board of Governors, in a speech in New York. She said that investors have already priced in the end of QE2.
Skeptics point to last April when a Fed program to buy mortgage bonds ended. A report by David Rosenberg, chief economist at Gluskin Sheff, outlined what happened between April 23 and August 27:
—The Standard & Poor's 500 index lost 153 points, or 13 percent.
—The yield on the 10-year Treasury sank from 3.84 percent to 2.66 percent, as fears over a double-dip recession sent investors into safer investments.
—Gold rose from $1,140 an ounce to $1,235.
"Sure, there's the possibility that the economy can stand on its own two feet now," Rosenberg says. "But we haven't seen that happen yet."
Another risk? Many investors believe the Fed will extend QE2, despite signs the economy is strengthening. Thirty percent of the 70 economists and money managers surveyed by CNBC in March expect the Fed to keep buying. Failure to do so could sour investors on the stock market.
Many investors have become addicted to the Fed's help, says Robert Arnott, chairman of Research Affiliates, a money management firm.
"Most expect it to be over but secretly hope it won't," he says. "There's a whole lot of wishful thinking out there."
Complicating everything is the debate over raising the federal borrowing limit. Treasury Secretary Timothy Geithner recently said the government may hit the $14.25 trillion debt ceiling as soon as May 16. If Congress fails to raise the limit, the government will lose the ability to sell new bonds to pay off debts coming due. In the worst-case scenario, the government could default, leading to a financial crisis.
"All hell breaks lose," Arnott says. To be sure, the economy is more stable than last year. Unemployment has dropped from 9.8 percent to 8.8 percent in four months. Consumer spending has increased for eight months. Fed officials have turned their attention to rising food and fuel prices.
Many see the end of Fed support as a badge of good health. "We have to take the training wheels off at some point," says Richard Skaggs, equity strategist at Loomis Sayles. He dismisses Rosenberg's argument that stocks could fall and bonds could rise in a repeat performance of 2010.
"The past doesn't really repeat itself," Skaggs says.
Earlier this year, Skaggs was worried that the Fed's bond-buying was causing stocks to rise too quickly, setting the stage for a fall in June. But stocks dropped in March in response to the earthquake in Japan's earthquake, rising oil prices and other world events.
Now Skaggs believes markets rest on more stable ground. When the Fed wraps up its program, the economy and financial markets may wind up better off if it means oil, wheat and other commodity prices drop. "I've gone from being nervous to having my fingers crossed," he says.
Investors anticipating withdrawal symptoms since Uncle Sam has been funding and bailing them out for quite some time? =.= /s
Big money buying futures and ETFs.
Demand is actually slowly and steadily decreasing.
It's likely the commodity bubble will break...big...this summer. Unless there's a QEIII.
Interesting take. The drop in interest rate on the 10-year Treasury bill is very telling, in my opinion. Is the U.S. dollar stronger than a lot of folks (me included) have believed in recent years?
I suspect you are right.
Any idea on what the next bubble is?
Many years the market falls back in the summer months. That fact combined with the President campaigning when he is not on vacation or golfing will likely be full of speeches pushing his class warfare agenda. The markets wont like what he has to say.
government
There will be a 3. There is no other choice except the breakdown of the Ponzi.
“Could the financial markets be heading for a June swoon?
The answer likely hinges on what happens after the Federal Reserve’s $600 billion effort to boost the economy expires.”
This program isn’t “expiring.” It just means that the government had to print $600 billion to paper over the deficit since they couldn’t sell that many bonds on the international bond market. The Chinese and Saudis just don’t have enough money to buy up all our debt even if they wanted to. So we print money. Since the government will have spent all that money by June, that’s what they mean the program is “expiring.”
And then, with the increase in the debt limit, the Treasury & Fed will print QE III.
I'm PROBABLY the last person in the world who thinks we're still in a strong deflation. A classic debt deflation.
When real property continues to go down, all other price swings, IMHO, are illusory.
The commodity surge MUST be driven by very very cheap investment money (Institutions borrowing from the Fed at 0% and/or trading their Treasuries for cash). Demand is down. Supply is up (for the most part). The real economy is in the toilette.
The velocity of money is as low as it's ever been...banks can't lend all this free money because folks won't borrow it in sufficient numbers.
What's different between this deflation and the 1930's is that our government is simultaneously destroying the currency...and only partly via the printing press. The greatest danger to the US Dollar is Sovereign Default.
When the Sovereign defaults on it's debt, the fiat currency of the Sovereign should become instantaneously worthless.
So yeah, I think it's a commodity bubble, followed by continuous wealth destruction and debt deflation. Shortly thereafter, default and currency collapse.
As little as two months ago I figured the dollar would survive as I didn't see the printing as an existential threat, just minor devaluation. Now, with Sovereign Default nearly certain I cannot recommend buying and holding cash, not even European cash. When the USA defaults, and it will, the only money will be gold, land and sweat.
And, those holding gold are paying a premium right now and will take a significant hit in the long run. But, they'll hold some wealth.
I'm thinking farmland, water rights, mines, growing timber etc. Real purchases...not paper assets.
And, even that assumes Property Rights and Rule of Law neither of which is certain.
Short term...buy and hold cash. Wait for that 30 day window to convert it to something real and something CLOSE.
Weapons and Ammo. Maybe mules and farmland:)
We already have it...it’s our bubble brained president semi pro golfer...corner the market on Obama. 2012 t-shirts cause he won’t be needing them after his bubble busts
“There will be a 3. There is no other choice except the breakdown of the Ponzi.”
You are correct. There is no way they can let up now. They’re gonna ride this thing right off the cliff.
QEIII will finish us off forever.
LLS
“banks can’t lend all this free money because folks won’t borrow it in sufficient numbers.
“
Agreed, but let me add that during the downswing the banks tightened money lending/credit rules, FICO changed their scoring, so now many people no longer qualify for credit. Banks also closed many accounts as they tried to rid themselves of other bank’s toxic paper and systems they inherited.
We had a WaMu credit card. Nice rates, decent limits, things were going great, but it was WaMu and Chase got them in the downturn and wanted to close those accounts for many reasons. They closed ours. We will never do business with Chase again.
Big bubbles in both right now. Farmland is so expensive, that a lot of guys are going to get caught short sooner or later (seen it before). And ammo is so expensive that I wonder about it also.
bump for tomorrow
BS is the next bubble, once there was almost no demand and even very little tolerance but now there are millions who simply cannot live without their daily dose. Those who dispensed it were tarred and feathered and ridden out of town on a rail in the old days but now they are raised to the highest offices, including most conspicuously the presidency of the United States of America. Like all bubbles I expect it to burst at some time though, even Americans will get their fill at some point and tar and feathers may be the bubble to follow.
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