The Open-Ended Bernanke QE3 Won't Be Open-Ended For Stock Prices And Commodities

Make Money Blog$~Stock prices are up 16% in 2012 while core inflation is only 2%. That is the relationship driving stock prices higher for the time bring. And Fed Chairman Ben Bernanke has promised to keep buying bonds and mortgages until he sees a greater measure of economic growth and job creation.

That is is what is unique about QE3. It is open-ended and I don’t believe the markets have absorbed what this might mean. That’s because the Cassandras are wailing about hyper-inflation. But, I don’t see how you can have hyper-inflation with 46 million people on food stamps.
And Bernanke’s Fed is the only economic policy making unit that can effectively do anything, because he doesn’t need the Tea Party’s approval. Fiscal policy is dead on arrival and coming to the crisis point after election day. Bernanke has the short-term and intermediate term economy on his shoulders.

Let’s go to the videotape for a short history lesson. The chart below proffered by BMO Nesbitt Burns in Toronto shows that after QE1 was expanded developed equities rose 47%, emerging market equities gained 72%, CRB commodities, 28%, Brent crude 50%. That was when QE1 was “expanded”. What will happen if indeed Bernanke maintains QE3 throughout most of 2013, pushing the cost of borrowing slightly lower?

Click to enlarge

No less a financial institution than J.P. Morgan weighed in this week with its perhaps tongue-in-cheek prediction that “The Coast Is Clear” for US equities which have outperformed European stocks by 34% since 2010. Morgan underscores that solid profits in stocks of US multinationals have been made despite the coast not being clear for a cyclical turnaround in the US economy. The markets have generated positive returns- I’d say– because everyone is on the Bernanke Pavlovian reaction; buy on hints, advance notice, actual announcement of QE.

QE3 could go on forever since there is no pragmatic sign adding money to the system will revive housing by any considerable measure. First, money going into equities has no secondary effect on money going into housing. Second, mortgage rates cannot go that much lower– and even if they do it will be because the economy is slowing Thirdly, banks haven’t shown any great interest in pushing loans to would-be homeowners. Lastly, selling short term securities to finance the government can only push short term interest rates higher– thereby boomeranging Bernanke’s hopes.

A shrewd reader of mine who goes by psperry1066 does not believe over-allocating money to stimulate the economy is going to work. He points to the over-allocation of capital to dot.coms in the 1990s– which backfired and lost fortunes for ordinary investors. Same with the over-allocation of capital to housing 2001-2007 which ended in the bubble that got us to this frustrating spot. psperry wants Bernanke to raise short-term interest rates slightly in order to crack oil and gold and food prices so that we can start over from a worse place and lead up to another boom.
So, have a look at the charts below for your personal guide on the Bernanke QE market for stocks and commodities– and ask yourselves how much longer it has to run. QE3 is potion for the markets but possibly not for the economy. There’s the rub.

source: forbes.com

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