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Thursday, September 13, 2012

QE3 Finally Enacted-- What it means?

Such a depressing topic of which we write, we're going to choose to break up the long read with cheerful pictures of flowers (all taken by yours truly)...

It will make the effects of QE3 easier to digest we hope...

After 20 months of endless cock-teases, Bernanke has finally committed to QE3; committed like a poker player pushing all his/her chips into the center of the table for one make-it or break-it bet..


Here's how Yahoo Financial describes it:

"In an unprecedented and controversial move, the Federal Reserve today announced the initiation of an open-ended round of Quantitative Easing (QE3) and extended the period for which it will keep rates between 0 and 1/4% to mid-2015... The Fed announced it will be purchasing $40 billion in MBS per month"
OK.. What does that all mean?

*  MBS means 'Mortgage Backed Securities'.  The Fed will spend $40b a month to purchase the toxic mortgages and other 'junk' worth nothing that are being held by banks, mortgage institutions, etc so as to dramatically improve their balance sheets.

*  Unlike QE1 which cost taxpayers $1.7 Trillion and QE2 which cost about half a Trillion and was committed to in a finite period of time,  QE3 is open-ended.  It can go on for months... years... decades..  US Govt does not have authority to supersede so its all left to the discretion of the Fed.

* $40B x 12 months = $480B per year QE3 is enacted.
*  Keeping interest rates at near Zero does absolutely nothing to impact your lives in a positive way.  Its not about creating new jobs, offering you cheap car/home rates or ability to make refinancing easier.   This is the amount that banks can borrow.

The cheaper the rate, the more $$ they can borrow then speculate into the market or lend to other banks.  Why would Bank America for instance risk lending to you when they can lend to another big bank that is "To Big To Fail" meaning the loan has a 100% guarantee of eventual repayment?

See how it all works, yet?

*  Here's what the Fed said today:  "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability..."
 And here's how Yahoo! describes it:  "Employment is weak and is expected to be despite the Fed's best efforts. In response, the Fed is opening the spigots even further and vowing to continue to do so until this failed strategy starts working. There's a certain willful spunkiness to the plan, but in terms of economics it's little short of bizarre."

*  It's a bullish move in the sense that pouring more money into the system inflates values. Stocks, gold, oil... basically everything except the dollar "should" go up in value.   That means corn, wheat, soybeans, cotton, coffee... everything that's a tradeable commodity.

That means you and I... WE will be paying more for Everything and that does not even take into consideration the eventual repayment of these debts via higher taxes and dramatic cutbacks to social services and 'entitlements' later on.
Remember:  All the rebellions in North Africa and specifically Egypt wasn't about hatred for dictators-- they tolerated them for decades.  QE2 caused a dramatic spike in the prices of food and when most people in that area are making the equivalent of $2 US dollars/day and one can not afford to purchase rice or grain,  they're not going to quietly starve...

QE3 is going to stir massive unrest by mid 2013 in many under-developed populations.. Perhaps more embassies attacked.. And maybe even beginnings of outward dissent in more economically disadvantaged parts of the US... Food stamp cards can only hide so much...

* President Obama can now breathe easy-- he got re-elected.

Most people know nothing on finance or economics.  They judge the health of the economy on two factors.. how they're doing personally and how the market is doing.   Even if people are struggling for years, they need 'hope' as empty as it is.. Seeing a spiking Dow (even if they don't understand the nuts & bolts 'why' gives them that hope)
They desperately want it to get better... They see the Dow +100.. +200..  Ta Da!  It must be so.. Heavens Praised!!  And who benefits-- the incumbent promising everything will get better or the challenger who promises slash n' burn?

* The one "positive" we see from this move is that no one will have any expectations for October.. or November..  After 20months of cock-teasing, Ben the Bastard finally emptied his 'load' upon the begging, open-mouthed Investors..

The market has spiked over 200pts today..  Yay to the Evildoers..  But ultimately the market can not rise forever and the Big Bazooka has been shot..  When Investors end up seeing little bang for the buck compared to QE1 & 2, what more can the impotent Bernanke do to stir excitement... Really?

In summary, 2012 should finish quite smoothly.. barely a ripple.

2013 is now going to become a quite brutal year in ways we don't even have the time to begin to explain