Market Talk

Bruce Krasting caught the biggest tidbit to come out of Ben Bernanke’s rather boring testimony today (which I first saw on Zero Hedge) , does the grim math, and comes up with a conclusion that shows just how worthless, literally worth less, the Fed is making the dollar.

Alabama’s Richard Shelby asked the Fed chairman how he decided that $600 billion was the right amount for QE2. You can watch the C-Span video for yourself; the exchange comes around the 32-minute mark.

The Fed chairman explained that the central bank’s rule of thumb has been that roughly $150-$200 billion in bond buying has the same effect on the economy as a 25 basis point rate cut in the fed funds rate. So, by going out and buying $600 billion worth of Treasurys, the Fed is essentially cutting interest rates by 75 basis points. I say essentially, of course, because with the actual fed funds rate at zero (a band between zero and 25 basis points, to be precise,) it can’t cut interest rates any further. So it buys bonds.

Krasting takes the rule of thumb to its logical conclusion:

The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2)

That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.

I don’t think that this has ever happened before in the USA. The examples I can think of in history outside of the US all ended badly. Ben has set monetary policy so that interest rates are 5-6 % below inflation. There can be only one possible result. Inflation of everything we use is going to explode. Food, clothes, energy, transportation, ball bearing, plastics, you name it. The only thing that is not going to get inflated is wages and residential real estate. Cheap money will not fix structural problems.

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I’d opined last week on the News Hub that the trading across markets felt like a frenzy. Stocks, gold, all commodities, really, the dollar, the euro, all currencies, too, Treasurys, everything has been moving at hyperactive speeds. It’s something to be wary of, because this kind of trading in and of itself is a red flag.

Bruce Krasting apparently agrees. From a post on Seeking Alpha:

My success ratio of calling short-term tops/bottoms in markets is about 1 in 4. Lousy. With that caveat I tell you I cut all my trading positions yesterday morning. I cut the long gold short dollar stuff. I took off a bunch of equity high alpha stuff. I cut the syndicate stuff to as small as possible. Why? Because all this ‘stuff” is getting to scary prices, and it is happening too fast.

He wrote that early, before the jobs report, and while he does the QE2-odds thing, his takeaway is this: “The stupidest most dangerous monetary policy decision in the past 70 years is good for stocks? When does the reality set in that we just set the ship of our own demise?”

Good questions, when you think about it.

Reports are that European leaders are huddled in one big, nonstop, weekend-long emergency meeting, trying to figure how they’re going to squelch the panic that is growing in what at this point is starting to look very much like another frightening spike in the credit crisis that threatens to plunge the globe right back in the drink.

I’ll be honest with you, this is a time to choose words carefully. But honestly speaking, this is a crucial, critical point for the entire globe. If European leaders don’t undertake some massive action now, this very day, the Greek sovereign debt crisis risks unraveling the global financial infrastructure, which remains shaky. That sounds scary to put into writing, but I do believe that’s where we are. The Europeans may understand that, or they may not. You should hope they do.

“If this weekend only produces a reaffirmation of platitudes in this regard, next week will be very bad,” Simon Johnson writes at Baseline Scenario. “This is fiddling while cities burn.”

Alistiar Darling, the British finance chief, is flying to Brussels to meet with the EU’s 26 other finance ministers on Sunday, the Telegraph reports, as Britain has been “ordered” to participate in a plan to save the eurozone, even though it isn’t part of the eurozone, and even as the UK is currently effectively without a government, as they’re still trying to figure out who actually won this week’s election.

They’re calling it a “European stabilization mechanism,” and the fact that what was a regularly scheduled summit meeting Friday has turned into an all-weekend emergency meeting where they’re going to hammer together something shows at least that Europe’s leaders are starting to understand the very dire circumstances they are facing. But few details have emerged.

There has been a constant pattern to this crisis: the markets get worried, European leaders make some strong sounding comments, float an idea or two, the market backs off, there’s a rally, and some time later the fear trade picks right back up, only that much further down the spiral, because the leadership just wasted some of their precious credibility by talking without actually doing anything.

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