The primary reason the markets have held up since QE 2 ended was because the bulls believe QE 3 is coming soon. I myself believe this is true (that QE 3 is coming) but it’s going to take a lot more for it to arrive than most expect.
The three reasons I believe this are:
1) Internal dissent at the Fed
2) Bernanke is now a political PR weapon
3) The UK riots
Regarding #1, during the latest Fed FOMC meeting, three Fed Presidents voted against the policy of extending ZIRP through 2013. This was the most dissenting voters since 1992.
What this tells us is that the days of easy free money from the Fed are over. Remember, this wasn’t three dissenting votes against QE 3, this was three dissenting votes against keeping interest rates low.
Understand, these guys would only vote against loose money if they knew it was problematic. And I can assure you, some of them are thinking about what’s next career-wise (the next Fed Chairman will have to be more hawkish). If I were a Fed President looking to move up the ladder, I’d certainly be building a track record of voting against more money printing.
So any move to launch QE 3 is going to be met with fierce resistance. Indeed, the only thing that might permit QE 3 to happen would be for a large bank to fail or a full-scale market crash (S&P 500 sub-1000).
Regarding #2, both Rick Perry and Michel Bachman have taken public jabs at Bernanke in the last week. Do you remember any Presidential candidate (other than Ron Paul) taking jabs at the Fed in any of the elections of the two decades? NOPE. The Fed barely even got mentioned during the elections.
This tells us point blank that Bernanke and the Fed will be an issue during the 2012 Presidential election. This means that the Fed will be under much greater political scrutiny, which in turn means no QE 3 (or other politically unpopular moves) unless we have a disaster or major bank fail. QE 2 was unpopular enough (a record number of Americans say they’re paying more for food today than ever before). QE 3 will be even more so.
And of course, there are the UK riots to consider. While the mainstream media is downplaying that mess, I can assure you the politicians are aware of it and pondering whether it could happen in the US (it can and it will). The Fed may be an alleged “independent” political entity, but that doesn’t do much for you when people are setting buildings and cars on fire out front your office. Bernanke is beholden to the banks. But the banks aren’t going to stop riots.
My primary point is this: the political and social environments in the US are growing increasingly anti-loose money from the Fed. The Fed knows this which is why we’re seeing dissent internally (see Dallas Fed President Dick Fisher’s comments from earlier today).
So absent some kind of catastrophic event, QE 3 isn’t coming any time soon. Which means the floor has come out from under stocks (it just did). Which means…
The next leg down is here.
If you thought the first leg down for this market collapse was bad, wait until you see the next one. I fully expect we’ll see the S&P 500 down to 1,000 in short order, or possibly even lower.
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