The U.S. Bureau of Economic Analysis revised third quarter GDP growth up to 4.1%; the previous estimate had market activity increasing 3.6% for the period.
GDP estimates helped distract “the market” from other news and sent the Dow Jones Industrial Average surging up 3%, to 16,221; gold dropped another 3% on the same reports, and yields inched up. The 15-51 strength Indicator was essentially flat. See below.
In what was Ben Bernanke’s last FOMC meeting before his January 2014 retirement, he instructed the Fed to begin slowly unwinding their controversial quantitative easing (QE) program. Beginning in January ‘14, Wall Street banks will receive $10 billion less per month, or $75 billion, of freshly new printed money every month. In the announcement Bernanke cited stronger economic numbers (GDP and unemployment) as reasons to lower the amount of monetary stimulus. However, Bernanke also stated that the Fed intends to keep interest rates low well into the future – far beyond 2015 – even if the unemployment rate falls below their key level of 6.5%.
So if the economy is indeed stronger, the recovery more solid and stable, then why must interest rates be kept so low for so long?—And why can’t QE be unwound faster and more definitive?
Truth be told, world central bankers are scared to death of higher interest rates. A rise in yields will force many European states into submission. They can’t afford their debt now, and higher interest rates will only push more of them into bankruptcy. Only blind-men can’t see this.
This is corroborated by the vast number of Wall Street and media pundits that prove to be confused about QE movements – what they mean and how they impact currency and market activity. Call me a cynic, but the “experts” don’t know what the real deal is then they have an excuse for not seeing the next correction coming. They’re famous for that.
The purpose of QE is to keep interest rates low in hopes that the lower interest rates will spur economic growth. It clearly hasn’t worked. Rates have been low for a long time and banks are still tight and the economy is still fragile. The reason for this is simple: banks see inflation (a.k.a. the cost of money, a.k.a. yields) rising in the near future, and as a result, they see little possibility of lending profitably at these low interest rate levels. So they don’t.
QE has succeeded in keeping interest rates low but it has come as a market hindrance – not an economic benefit. Profit is the main motivator of market activity. If its opportunity is farfetched lending doesn’t happen. And that’s what we’re seeing.
There is little doubt that Bernanke’s replacement, Janet Yellen, will quickly reverse the tapering course and increase QE the moment yields begin to rise in ’14. The economy is still fragile and unemployment is stubbornly high. Inflation is low, indeed, but that’s because QE money is not getting down to the Market level – to consumers, business, and enterprise. Instead, QE money has only found its way to the coffers of wealthy Wall Street bankers.
Indeed, a 4% GDP growth rate is much improved than what the American Market has been experiencing lately. However, that level was achieved in just one quarter of the three so far this year. Growth for calendar year 2013 is expected to be just 2%, a feeble pace to say the least. That’s why unemployment hasn’t recovered – and why the Fed is so adamant about keeping rates low in the foreseeable future.
That’s also why this QE taper is just a gesture.
Bernanke wants to end it. He really does. But he just doesn’t know how best to do it with little monetary or inflationary impact. Think about it. At some point the Fed will have to unwind QE (the act of selling U.S. Treasury and mortgage backed securities for cash) to therefore remove the new cash it printed during easing. Remember, QE was instituted to keep yields low; to reverse it will invariably send yields higher – and that will cause world havoc.
History has a tendency of repeating itself – especially when world governors make the same stupid mistakes.
The Federal Reserve is re-inflating a balloon destined to burst like all previous ones. There is no economic reason for stocks to be trading this high. None. It’s a QE boom. And it too shall bust.
Don’t get caught off guard. Markets remain extremely manipulated – and that includes gold.
Stay tuned…