More Quantitative Easing by Fed has Markets Spooked About Inflation

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Well that was a short dollar rally. December gold futures hit $1,174 in intraday trading before settling down $1,164.80. That was still up nearly two percent. And gold is now up almost 32% on the year. Copper, silver, and oil were up as well.

But then everything is up this year, at least since the markets started buzzing in March. The S&P 500 is up over 64% from its March 6th low. That’s an exceptional bounce even by dead cat standards. With negative real interest rates in the States, owning cash is losing money. Hence the rise in stocks.

Yes, rising U.S. stock prices could have something to do with a fictitious recovery. But with labour markets weak and housing getting worse (rising foreclosures) we’re not counting on it. So we’ll stick with the credit-fuelled stock rally.

It’s gotten so surreal on markets that yields on some three-month Treasury bills briefly dipped below zero in trading action. As it is, the yields on Treasury bills are hovering just above zero. Bloomberg reports that, “For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate.”

Why would investors lend their money to the American government for nothing? And why would they continue buying stocks at the same time? Ponder….and discuss.

We think the answer is that the Fed’s policy has forced global investor into an either/or situation. You either get out of cash and into equities to beat inflation. Or, you are so terrified of buying equities divorced from normal valuations that you prefer capital preservation in the form of Treasuries, even if you’re losing out to inflation there as well. At least you get your money back at a non-inflation adjusted par value three months later.

Or, you could buy assets like gold, oil, silver, and copper.

Why the sudden move in markets yesterday? It could be that Federal Reserve of St. Louis President James Bullard told markets the Fed should keep buying mortgage-backed securities after its self-imposed March deadline for exiting the market expires.

The Fed’s plan to purchase $1.25 trillion mortgage debt and agency securities has effectively kept U.S. interest rates from creeping up. It’s also kept the housing market afloat, although even at these levels you are not exactly seeing refinancing boom. But it’s the prospect of more quantitative easing by the Fed that must have markets spooked about inflation.

Bullard said, that, “If the economy came in very weak, let’s say, in 2010, weaker than expected, we would have the option of doing further quantitative easing.” The Fed would do this through additional asset purchases, presumably with more, uh, “money” it created.

Bullard also said that, “If the economy came in stronger than expected and inflation expectations started to ratchet up a little bit we could maybe sell off some of these assets and remove some of the accommodation from our quantitative easing program.”

The market must not have heard that second part. Or maybe it didn’t believe it. Maybe it concluded that the Fed loading itself up with mortgage-backed securities is not a healthy expansion of the central bank’s balance sheet. Maybe that’s why the dollar fell and gold rose.

Hey it turns out that we were wrong and man-made global warming is real after all. A bunch of scientists have colluded to invent it by suppressing evidence that the earth is actually cooling. It turns out that empirical data do not support the agenda to expand government power and control over nearly aspect of our everyday lives.

How inconvenient!

You won’t find the story of the leaked IPCC e-mails in too many main-stream press outlets. Most of the media is in collusion with governments to cram some sort of climate change carbon law down our throats. Publishing evidence that suggests there is still real scientific debate doesn’t suit that agenda.

Before you send us e-mails condemning us to hell for hating the earth and clean air, let us make a small point. Of course the climate is changing. But – as these leaked e-mails show – the scientific community is not nearly as unanimous in its “interpretation” of what the climate data are showing as the political community would like you to believe.

Be sceptical. It works with investing. It works with politics. Any time a group of people tries to shout you down and make major changes to the law, you should be very concerned. The debate about how we inhabit our ecosystem is an important one. But it’s obvious the science has been politicised.

And please don’t write in saying that doing nothing is not an option. Doing nothing IS doing something. It means NOT doing something stupid until you have a fuller picture of what’s going on. And there are still many in the scientific community who are modest enough to admit that the earth’s climate is too complex a system to determine whether releasing carbon dioxide into the atmosphere is actually causing temperatures to rise today.

If you were even more sceptical, you might conclude that promoting global warming (or climate change) has become a lucrative industry for both scientists and failed U.S. presidential candidates with massive carbon foot prints. Both have a strong desire to tell other people how to live.

In any event, climate science is not our beat here. But the behaviour of hysterical crowds and how to survive it IS our beat. So have a look at the ClimateGate story in your spare time and let us know what you think. And in the mean time, keep an eye on your wallet and your mind on guard.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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43 Comments on "More Quantitative Easing by Fed has Markets Spooked About Inflation"

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mike
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…many faith-based scientific groups concur that at the rate the earth is cooling, by the time judgement day arrives…hell could actually be at room temperature, which should alleviate many of the fears and concerns held by politians past, present and future…

GB
Guest

anyone noticed the head and shoulders pattern formed on the ASX? its right at the final shoulder – wonder if it means a correction is imminent

Unpopular Truth
Guest
Politicians (and more accurately, the real power brokers behind them) have used this formula for as long as history goes. If you want to change something about the society you live in which is mainly for the betterment of yourself rather than the majority, the way you do it is thus: 1) Create a problem, or exagerate an existing one to make it everyone’s issue. This is done via control of information (propaganda) and squashing counter opinion (either through discrediting, muzzling, cutting funding, etc) 2) Create a solution to the problem, but incorporate the real objective into this solution. Sometimes… Read more »
Drew Weeks
Guest
Hey unpopular truth I’m in agreement with you. It’s really alarming how everyone goes through the same patterns of fallacious thinking. The hucksters of the world speaking in psycho-babble have a major advantage over those trying to talk about reality because most people don’t live in the latter world nearly as much as they require the former to survive. Junk science and patterns are things people need every single day and they draw conclusions and create faulty syllogisms because it fulfills their base instincts. Try unwrapping a life of making incorrect, incomplete or outlandish ideas which stem into millions of… Read more »
Dan
Guest

What you say is very true, Drew.

Ned S
Guest

Yeh GB; ASX is struggling, Dow is doing nicely – The thought has crossed my mind that could be consistent with them nasty Yanks pulling their moolah out of our markets and sneaking it back into their nice “safe” little currency back home … But who’s to know eh? (The Baltic Dry has been doing real well.)

Ned S
Guest

Hey Biker, have you been getting the impression lately that when Oz governments mention “affordable housing”, they are talking about affordable rental accomodation? I sure have! :)

Sambo
Guest

Do you think the pro-climate-change Governments will want to tax the gold miners to death? It is a very dirty industry. They could also put in some laws that condemn gold ownership, increasing the power of fiat currency. Plays into their hands nicely?

Joyce
Guest

they may be right. they may be wrong. who can prove? i believe less pollution is better. more clean air, clean water for us and our future generation is better. compared to people living in other parts of the world, I believe sacrifice a little bit does not hurt us much. thank you.

Patrick
Guest
I read today DR and was appalled. In general these types of newsletters are simply entertainment and nothing more, otherwise our friends at DR would be on top of the Forbes list rather than writing pages and pages on a daily basis. The point on climate change however is so ridicolous only someone without a brain or serious special interest could make it. Hackers with an agenda (they dont do it for fun suprise suprise) illegaly hack into university servers and selectively leak emails dating back as far as 10 years. A few select phrases are then used to discredit… Read more »
baal
Guest

let’s see:

adult to child: ” your up all night locked in a candy store and you will have a belly ache in the morning …”

idiots to to idiots: “yes, let’s drill more oil wells and strip mine some more, after all we have our needs…”

so there is no future after you die ? there is no future for the children because we refuse to deal with the fact that: there is not enough water, NOW. the air is polluted, NOW, that is the cause of DISEASE, NOW, not smoking, not drinking, not eating red meat……

Ned S
Guest
I like the Russian take on it – So if we keep polluting the Earth it will be warmer and we will have a longer growing season for our crops and we’ll not need to spend as much on heating our homes and workplaces and the ice will melt so it is easier to get at the mineral resources we need to pollute the Earth some more – And you say this is bad??? Plus as we aren’t a big polluter by global standards anyway (well not in relation to CO2 emmissions – Smile!) the silly buggers in the West… Read more »
Leo
Guest

Sorry Patrick,
Your statement “A review of scientific journals would show that 99% of scientists believed the globe was warming due to man made causes” doesn’t give your article credibility. This motherhood statement purporting to be factually accurate needs challenging. In some journals scientists opinions support your statement and in other journals scientists dispute your statement.
Where are your facts? Where is the statistical proof that there is global warming?

Maj
Guest
Well, November looks like breaking all records temperature-wise (as well as that one-day rainfall in Melbourne). http://www.theage.com.au/environment/records-broken-in-november-heatwave-20091124-jex2.html Although living here, I would normally be able to personally confirm the above; I am thankful for those hacked emails telling me I needn’t worry. Two more for discussion: “Warming diagnosis: beyond worst case” http://www.theage.com.au/environment/warming-diagnosis-beyond-worst-case-20091124-jhco.html and “Planet approaching point of no return, experts warn” http://www.theage.com.au/environment/planet-approaching-point-of-no-return-experts-warn-20091124-jhes.html If it’s true that “March last year had the warmest global land temperature of any March measured, and June and August this year had the warmest land and ocean temperatures recorded in the southern hemisphere for those months.”… Read more »
Unpopular Truth
Guest
Thank you Leo. Thats the key thing. 99% of scientists agree.. big deal. 99% of scientists base their opinion on the same false/fudged set of data, then of course they’ll agree. Plus you tend to turn yourself into a pariah to do otherwise. It becomes a ‘me too’ situation, which helps nothing and proves less. It’s the 1% of people who push the truth and facts which are actually important to the discussion. Ruining our economy by introducing an extra tax system (and make no mistake, that’s what it is dressed up as a think of the children solution) is… Read more »
Drew Weeks
Guest
Patrick do you mostly get appalled when someone has a different opinion to yours? “You won’t find the story of the leaked IPCC e-mails in too many main-stream press outlets. Most of the media is in collusion with governments to cram some sort of climate change carbon law down our throats. Publishing evidence that suggests there is still real scientific debate doesn’t suit that agenda.” This is what you found so distasteful? I can only assume you don’t like the scientific process (thats okay alot of climatologists are in the same boat). Are you one though? If you’re not you… Read more »
Dan
Guest
Dan D, I think your assessment is right about the forces behind the rally (credit). People can see the money printer going into turbo-mode, and have all upturned their umbrellas hoping to catch some electronic rain. As to what the big game is all about, well I still think it (the financial system – not the economy) is a great big cat which is as good as dead and the system needs reinventing before it will result in lasting prosperity again. It all depends on what you measure to determine the vitality of a system – employment? factories open? price… Read more »
MadJack
Guest
Patrick, “A review of scientific journals would show that 99% of scientists believed the globe was warming due to man made causes. ” Wow, was this done? Gee, all published scientists you say? Where was this published? Are you sure it’s 99%? Why couldn’t the scientists who don’t believe this get published? Oh, that’s right, it would be politically inconvenient to let the other perspectives known, right? Silly me, sorry, I thought it was about the science, not mob rule. It is exactly this sort of stunt that got Mann etc in trouble with those emails in the first place… Read more »
Justin
Guest

I for one think the depression will be good for the country. Having just spent the day toiling in the fields, those weeds won’t dig themselves up, I will be happy to put starving, desperate city folk to work digging weeds for some jam spread over a cow-pat.

Ned S
Guest

Justin – Depressions tend to be depressing for ordinary folk. Although a nice basic little recession probably wouldn’t do Oz excessive harm? Either way, we get what we get – And it’s nice to see your sugar going up! Cheers … Ned.

wasabu
Guest

Politicians are clever indeed.

However don’t throw the planet out with the stinking swamp of egomaniacs.

There is no doubt that politics has piggy-backed a clear planetary dynamic. Further, evidence mounts that a number of storms will hit in the next few years.

Bunker down.

Joe
Guest
I do not believe all the scare stories. I didn’t buy Mr Gore’s inconvenient conclusions either. I do however believe that 7+ billion of us burning everything we can find without restraint whilst at the same time stripping down everything that naturally scrubs our atmosphere and err … well … burning it some more, is not the way to ensure future generations have a nice World to live in. I believe there are limits to our World and that 7+ Billion of us with our current lifestyle might just be about it. So a tax on carbon emmissions by way… Read more »
Justin
Guest

Nope, don’t agree Joe. What is the market price of carbon? not much, so any carbon trading scheme cannot reflect real value & free market principles.

Just another scam for risk free profits for the finance crowd. I’m not at all surprised the big money funds are knocking down the politicians doors wanting a slice of the action, and that comes straight from the mouth of Mike Kelly, member for Eden-Monaro.

Go Barnaby Joyce!

Dan
Guest
Barnaby Joyce? I think anyone who gets dolled and propped up on a national morning TV show has to be about as bought as a … well something pretty nasty! There is a world of difference between a “scheme” which is really a “tax” (invented by schemers), and laws which demand better environmental standards. If you want less smog, then tell the companies “you shall produce less smog” – end of story. Ban imports which are produced in questionable ways, where the rubbish isn’t being cleaned up. Ban impractical and wasteful packaging. Mix, rinse, repeat, and watch them dance. Why… Read more »
Justin
Guest

Very cynical Dan, what politician hasn’t been dolled up & put on a national TV show?

Barnaby Joyce is just smart enough to see this carbon credits thing for what it is, a scam. More banker fueled credit expansion.

Drew Weeks
Guest
I haven’t been able to work out the details properly but I’ve been thinking that maybe part of this heroic-push to get the ETS up and running by ALP has been in part motivated by wanting to distort future figures of market performance, government revenue and it hit me like a tidal wave but I just realised the implications of the power this would wield (I’ll come back to this). I don’t think Penny Wong personally has an insideous agenda and she really believes what she is doing is right for the environment and progress towards a better world (well… Read more »
Dan
Guest

“Barnaby Joyce is just smart enough to see this carbon credits thing for what it is, a scam. More banker fueled credit expansion. ” .. he can afford to be against it because it makes no difference, except that he might save his seat at the next election.

Greg Atkinson
Guest
Come on Dan how on earth is the ETS going to save the planet when taxpayers money will be used to help the coal industry (and others) keep pumping out CO2. (even if they manage to hide some underground) Australia’s position is bizarre to say the least. On one hand we want to be seen as the good guys while on the other we are happy to export our fossil fuels and let others worry about the emissions they create. If we wanted to deal with any climate threats we would investing in science, not raising a tax and creating… Read more »
Ned S
Guest

The big reason for the rush is political – So Kev can strut his stuff as a leader on the global stage – It’s all a bit pathetic. Have a look at the following pic – When was the last time you saw anyone over the age of three pull a face like that (except in jest). And somehow I doubt he’s joking? But either way, I can’t come up with any explanation of it that isn’t scarey! : http://www.brisbanetimes.com.au/environment/ets-vote-looks-to-be-dead-in-the-water-20091127-jvv0.html

Dan
Guest

That photo is priceless, Ned.

MadJak
Guest

Hi All,

Maybe we can hire Ken Lay to run the ETS. He’s had experience with putting values on non tangible things in the past? If not Ken, maybe someone from Lehman Brothers might be able to come up with something?

Dan
Guest

Is it just me or is there really an eerie silence in the Australian media about Climategate?

It’s full steam ahead in the news towards a global taxation system based on that amazing little black stuff with a molecular weight of 12, upon which all life depends. They have finally found a way to tax breathing, but what will happen when we all find out it was based on manipulated data, intimidation and untruth? Someone went and looked behind the politicians’ and scientists’ backs and saw they had their fingers crossed.

http://blogs.telegraph.co.uk/news/jamesdelingpole/100018144/climategate-the-whitewash-begins/

Sum Fun Gui
Guest

You can see the University of East Anglia’s “Climate Research Unit” hacked emails here : http://www.eastangliaemails.com/index.php
And the Documents here : http://www.filedropper.com/foi2009 or http://www.megaupload.com/?d=003LKN94

Lachlan Scanlan
Guest

During photosynthesis carbon dioxide and water in the presence of sunlight and chlorophyll produce sugars and oxygen. Later during the respiration process carbohydrates are broken down to release energy water and CO2 which powers the chain of life as we know it. You could apply as much fertiliser as you like but without out the energy from photosynthesis and CO2 no plant has the power to absorb (active transport) or utilise it.
CO2 is to our lives like petrol/diesel is to cars. So the ultimate consumption tax is on such a core substance.

Joe
Guest
Justin, As carbon credits are slowly removed from the economy, the value of those remaining will (based on supply and demand) naturally inflate. There then becomes a point where it is cheaper to produce greener less carbon polluting energy than it is to continue the good old way struggling to buy your respective credits. It is a carrot and stick approach to encouraging a more sustainable form of commerce. If you cannot see this, how can you possibly understand any financial instruments? It really isn’t that complicated a priniple now is it? As for the current subsidies these are only… Read more »
MadJak
Guest

Dan,

Yes, the Mainstream media here downunder have been silenced. My views on freedom of the press here in australia have changed significantly over the last week. We have not real press freeedom, so we have no democracy.

This issue is no longer scientific. It is political. Too many high profile pollies have taken advice from a former US VP with a degree in fine arts and law.

We have all been sCRU’d

Justin
Guest

Nope, don’t agree Joe. Carbon credits have no free market value, if they did it wouldn’t require government coercion, that being the power to tax, to make a market.

Greg Atkinson
Guest

MadJak the scary part is that most of the people getting airtime talking about global warming probably didn’t even do high school science let alone have any degree even remotely related to what they are rambling on about.

The reporting by the mainstream media has also been biased and they basically label anyone who questions the science behind AGW as deniers as well.

What people tend to forget is that some of the most important scientific discoveries ever made were by “deniers”.

Coffee Addict
Guest
The reality is that recoverable hydrocarbons will be used over the next century whether we or our children like it or not. The only free floating variable is whether it happens sooner or later. The key issue may not be so much what causes climate change but rather the simple observation that the climate is changing. It always has and always will. A small shift in the Gulf Stream will for example freeze Northern Europe. I don’t have a degree in environmental science (so I’m out of my depth) but I am aware that once tipping points (in most fields)… Read more »
Ned S
Guest

I reckon my education in climateolgy ended when I was 12 but either way I’m pretty sure how those sciencetologists are going to affect my life – I’m going to pay more tax; So I’ll cut my usage – Then the providers are going to say Bugger this; We need more income to continue to live in the custom to which we’ve become accustomed – At which point they’ll raise their charges – On the assumption I’m addicted enough to pay more for less … C’est le guerre! :)

Ned S
Guest

Lachie – How did you go with your home based electricity generation trials? I have’t tried anything at this end – Except dropping usage – I’m a bit under $500 pa for one bloke in one house – Not bad I suspect given I’m 100% electric? (As in no gas, solar etc – Although I am considering going to wood burning if Kev really gets up my nose.)

Ned S
Guest

While I’m at it – Got my insurance bill from Suncorp this week (for a rental house) – $576. Hmmm … Hit the internet – A GUC quote rolls in (tricked if I know who GUC are?) – But at $465 (namely 19% under) I’m at least equipped to go shopping. Good luck to all – Unless you are a nasty bitter twisted piece of poo in which case you need to grow up! Cheers regardless, Ned!

Lachlan Scanlan
Guest

Cant remember saying anything about power production here Ned but having brought the subject up, theres enough rats here in the hay shed to power the whole town. We just gotta get em all onto a treadmill.

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