-- Posted Wednesday, 24 August 2011 | | Disqus
By: Dr. Jeffrey Lewis
Before Ben Bernanke lets a single sound slip from his mouth this week, investors have already put their money where Bernanke’s mouth is. Investors want a minimum of $500 billion in quantitative easing, betting on rising Treasury prices when Bernanke addresses the press about what the Fed’s next move might be.
Most analysts remain bearish on the possibility, noting that recent indecision from the Fed may prove to make QE3 a challenging proposition to the Fed Board of Governors, as well as the American public. At least one Federal Reserve member is pointing towards the structural difficulties of using monetary policy as a lever to incite economic growth.
Holding Fed Hostage
Investors have long been capable of holding the Fed hostage when it comes to quantitative easing, reduced interest rates, or any other monetary policy decision. Through a series of trades on the fair value of US Treasuries, as well as futures on the central bank’s benchmark rate, traders can essentially guarantee Fed action by creating better benchmarks. Wall Street looks for any event that beats or meets expectations, and the Federal Reserve’s policy decisions are not to be left out of the status quo.
Behind the scenes, bankers have even more at stake on a Fed policy decision. By using record low interest rates to purchase investment grade securities, especially corporate stock, the financial markets have priced in very consistent long-term growth in the American economy. Investors are buying equities for their dividends, using cheap leveraged fueled by the Fed’s balance sheets. Already, investors have used leverage in 2011 to a degree not seen since the days leading up to the financial crisis.
Bailing Out the World
Ben Bernanke has a tough crowd to please outside the realm of Wall Street analysts. He is now the proxy for economic growth not just for the 300 million Americans, but for the 7 billion people all around the world.
In extending cheap credit to get the US economy back on track, investors are keen on taking dollars overseas for direct investment, propping up emerging market equity, fixed income, and government-related securities. Pulling the rug out from underneath investors would necessarily shake out the biggest growth stories since 2009, a move which would also cause trickle down concerns in the United States as corporate profits decline.
The developed markets seem to have already found a saturation point. The European Union is expected to grow at just over 2% next year, and US growth prospects for 2012 were recently reduced to 1.1-1.6%, a rate which is not conducive to a full-blown recovery. If stimulus in the form of easing money was actually the solution to growth, one has to wonder why growth is impossible to find. Could it just be that all existing pockets needing investment interest have been stuffed to the brim? It may just be that banks secured by the US Treasury can now afford to speculate in emerging markets, where the risk-to-reward ratio is always positive on the premise of future bailouts.
Dr. Jeffrey Lewis
www.silver-coin-investor.com
-- Posted Wednesday, 24 August 2011 | Digg This Article
| Source: GoldSeek.com
