How Likely is QE-Three?

(or, “Is That Your Retirement Account You’re Holding On To So Tightly? Or Are You Just Happy To See Me?” Said The Man From The Government)

So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.

Sure: It’s fine when they do it to Saddam—
it’s another thing when they do it to you. 

They basically printed money out of thin air—about $1.25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.

In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.

Time passes, we move on.

Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase $600 billion worth of Treasury bonds over the next eight months.

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TOLDJA!! The Dollar Broke Lower—So Now What?

Update below (Tues. morning), with chart. 

Like Nikki Finke always says whenever a scoop of hers gets confirmed: TOLDJA!!

Picture of my girlfriend 
and the fish I caught. Honest!

A couple of weeks ago, I wrote that we were about to enter a crucial phase for the dollar. Then last Thursday, I wrote that the dollar was about to break through a key support level on Thursday or Friday. 

And what happened on Friday? Even after massive Federal Reserve, European Central Bank and Bank of Japan intervention on Thursday night? The dollar broke through! 

I was right!—TOLDJA!!

(Yes, I know: I’m an insufferable shit. But I’m also right. So you’ll just have to resign yourself to taking the good with the obnoxious.)

Now it’s all good and fine to have predicted when the dollar was going to break through a key support level—but the obvious question is:

Now what?

Will the dollar continue going down? Will it bounce back up? Roll sideways? What? (“You want answers?” “I want the truth!” “You can’t handle the truth!”)

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Me & Max Keiser

Max Keiser interviewed me the other day—it was fun, and Max is a great guy.

Here’s part i of the interveiw:



Part ii is after the jump:

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I Think Today Is The Day The Dollar Breaks Down

Update below, discussing the G-7 intervention. 

Update II below, discussing today’s action (Friday March 18). 

Update III below, one final chart. 

I could be wrong—hell, most of the time, I’m way wrong. But I do think that today is the day the dollar breaks down.

Get used to it.

Consider the evidence: 

The Bank of Japan managed to keep the yen down following last Friday’s Sendai quake. It was trading in an eerily placid 81-to-82 band on Monday, Tuesday and Wednesday—but then Thursday (Japan time), someone at the BoJ must’ve prematurely decided that it was all over, because they let go of the gas. 

What happened? It all went south—huge. As I write this morning (8:12am EST), the yen is trading at 78.50 to the dollar. 

Meanwhile, on the eastern side of the Pacific pond, the Producer Price Index numbers came out yesterday—and they weren’t pretty. During February, PPI rose 1.6%, against a consensus estimate of 0.7%. For the year ending February 28, the PPI rose 5.6%. (report here)

Tomorrow, the Consumer Price Index numbers come out—and if the PPI numbers are any gauge, they do not look promising. 

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Likely Economic Effects of the Japanese Earthquake

Living in Chile, I experienced the February 2010 earthquake. That puppy measured 8.8 on the Richter scale at its epicenter. In Santiago, the earthquake registered about an 8.2—and I was on a 15th floor when it happened. Believe me, it was quite the experience. I wrote a first person account of the earthquake here. 

Friday, March 11, 2011.

I bring this up in relation to the Sendai earthquake that rocked Japan this past Friday: It was an 8.9 (Richter), and wrought tremendous devastation. As I write, there is as yet no clear accounting as to lives lost, though it is likely in the tens of thousands. At least two nuclear reactor sites have been severely damaged; the Fukushima reactor #1 is close to melting down, and #3 isn’t in much better shape. Hundreds of thousands of people have been evacuated from the area, and further tens of thousands of people are homeless, following the tsunami. And millions of people are without electricity or running water. 

This is a tragedy for the Japanese people—the worst crisis since the end of the Second World War. 

To those of us untouched by the direct effects of this tragedy, we should thank our lucky stars. But rather than gawk at the lurid images coming through the media, it would be smart for us at this time to analyze the likely effects of this disaster on the rest of the world’s economy. 

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A Handy Guide to the Revolts in the Middle East—And Their Likely Effects On Us

The Middle East and North Africa. Click to enlarge.

In 1848, protests and revolutions swept through Europe. The specific causes were different in each country, but the underlying cause was the same everywhere: The middle and upper middle classes—politically powerless in these absolutist monarchies—wanted more control over their lives. 

We are having an 1848 moment in the Middle East: Autocratic governments in two of these countries have been overthrown outright (Tunisia and Egypt), one is sliding into civil war (Libya), and a host of others are teetering. A few other undemocratic governments beyond the Middle East are very worried that their restive populations might get ideas—China, I’m looking at you. 

The immediate spark for these revolts has been the rising price of food—but the fuel for this bonfire has been decades of political marginalization for large swathes of the educated population of these Middle Eastern countries.

Autocratic regimes never fare well during economic downturns. The Global Depression that began with the financial crisis in 2008 is slowly but surely picking up a head of inflationary steam, which has been squeezing the middle classes in these countries. A middle class being squeezed economically eventually oozes out political unrest—as we have been seeing throughout the Middle East and North Africa. 

Now, in early March 2011, with the fate of these various revolts still unclear, it would be wise to go over them, and see where they are in each country. And it would be wise, too, to examine how these various revolts in the Middle East will affect the rest of the world in the short- to medium-term. 

So to begin: 

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Sustained Unemployment Confirms The Failure of QE-2

So today, two bits of news came out: Unemployment declined to 8.9% last February, as the U.S. economy added 192,000 jobs; and the Federal Reserve signalled that it is definitely-definitely-definitely ending Quantitative Easing 2 (QE-2) in June, as originally scheduled, on the assumption that the economy is improving, and therefore no further extension of QE-2 will be necessary. 

Portrait of the author,
chewing over what it all means. 

On its face, this would seem to be . . . not good news, but at the least encouraging news: The economy seems to be improving, albeit anæmically. 

But is it? 

Stepping on the heels of the Bureau of Labor Statistics release of the employment figures, Tyler Durden at Zero Hedge pointed out that, based on the 25 year average of employment participation of 66.1%, U-3 unemployment ought to be at 11.6%—quite a bit higher than the current 8.9% headline number. 

This points to something that a lot of commentators of the BLS’s numbers have been saying for a while: The number of individuals in the labor market as defined by the BLS has been steadily dropping. But it hasn’t been because of some sudden demographic shock—it’s been because more people have been unemployed for more than two years. 

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The Dollar, and The Next Ten Days

I’ve never been much of a fan of technical analysis. It’s always struck me as something akin to reading tea leaves—and just as batty. But on the other hand, I’ve seen enough technical analysis deliver accurate predictions that I can’t really dismiss it completely. 

Right now, the world is going through a pre-crisis mode—you can practically feel it in the air. The limitless deficit spending by the U.S. Federal government, which has instituted systemic +10% of GDP deficits year after year; the insane Federal Reserve policy of Quantitative Easing 2, which is nothing more than debt monetization as I wrote here, enabling the Federal government’s addiction to deficit spending; the popular uprisings sweeping through the Middle East and North Africa, affecting—wouldn’t you just know it—oil producing countries one after the other; the steadily rising food inflation, which in fact triggered those uprisings in Tunisia, Egypt and Libya, and which are beginning to affect the entire globe; the inevitability of a collapse of the euro—the other major world currency—because of the systemic tensions affecting the European continent, between the strong economies of the north, and the weak economies of the peripheries. 

All these issues are bringing renewed pressure on the dollar—though which direction the dollar will react to that pressure is the issue up for debate right now. 

The next ten days will be key: Will the dollar spike up? Become the safe haven of everyone fleeing from the world’s troubles? Or will the dollar nosedive, the first big step down in its death spiral?

This is where we’re at—and this turning point is happening now: Right now. Consider this chart, sent to me by my friend in Hong Kong, Michael Hampton:

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