Place Your Bets – Fed Meets Today

by Kirk Kinder on September 13, 2012

Step right up, step right up, and place your bets. This is what the financial markets have become. Don’t worry about economic or profit numbers. Just guess what 13 bankers behind closed doors decide to do. Today at 2:15pm, the Federal Reserve will release its monthly meeting notes. Many people expect the Fed to announce a new round of Quantitative Easing(QE). The markets have rallied 9% in the past 7 weeks based on this fact. Usually, the markets rallied after the Fed announced new money printing. This time, the Fed just needed to hint at QE for the markets to move. Below is a great video by David Stockman who was an economic advisor for President Reagan. I want Stockman as my next President. He gets it. Stockman discusses how the Fed has turned the markets into a casino and has tarnished the capitalist markets. I wholeheartedly agree.

Since we are placing out bets, I am betting the Fed will hold off this month before committing to more QE. They will certainly promise more and will probably extend the 0% rates through 2015, but printing more money will create the following problems:
1. Gas is back to $3.85 a gallon nationally. Any move by the Fed will certainly  push it to $4 a gallon, possibly more.
2. The drought in the US has caused soy and corn prices to rise substantially. Any money printing will increase these costs. This is particularly painful to emerging market countries where food is a larger percentage of total spending. It also hits the poor in the US particularly hard.
3. The stock markets are at yearly highs. Since the hint of QE, markets have rallied 9%. Usually, QE has arrived after a 15 to 20% decline in the stock market. Essentially, QE maneuvers are done to boost the stock market. That isn’t needed now.
4. The 10 year TIPS breakeven is above 2% (see chart below). Inflation for the next ten years is projected for 2.3% right now. The Fed has not done any QE when the expected inflation is above 2% as the graph shows.
5. If things get worse, the Fed has emptied its chambers. Things are not that bad. Sure, the US economy is slowing, but it isn’t in recession yet. If the Fed steps in now and growth continues to slows, their hands are tied. They could do more, of course, when this happens, but that shows real desperation.
6. The elections make this tricky. The Fed doesn’t want to look political even though it is. Any action taken by them will be a political point for one party or the other.
Of course, the Fed’s overlords, know as Goldman Sachs, JP Morgan, Bank of America, etc., may demand that free cash now. We shall see later today so place your bets now.
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