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The Revival of the National Interest

–And now, the deluge. Or should we call it the Torrent Signal that our mate Kris Sayce has been banging on about for the last week?

–That’s right, that gushing, gurgling, sputtering, splurging sound you hear is the sound of hundreds of billions of new U.S. dollars flooding into the economy and the stock market. Over the next eight months, the Federal Reserve will spend an additional $600 billion it doesn’t have buying U.S. bonds in the name of “price stability.”

–If Kris is right, price stability is the last thing you’ll see at the small cap end of town in Australia. For a variety of reasons, Fed policy doesn’t seem to just trickle down into the small caps and junior resource sector. It rages on through like Old Man River.

–All up, the Fed is going to chuck in about $100 billion a month into the market. It said more large-scale asset purchases were possible if inflation was too low or unemployment too high. Remember, the Fed has a dual mandate of price stability and full employment. These days, price stability apparently means creating enough money to support asset prices, lest they crash.

–Even though we’ve said it before, it worth repeating: everything the Fed does these days is designed to support U.S. banks. Monetising U.S. government debt doesn’t do a lick of a good to improve the quality of the assets on U.S. bank balance sheets. The Fed is merely trying to keep interest rates from spiking; an event which would send even more banks into terminal decline because of its affect on the housing market (which is already in serious trouble) and would put households in further defensive mode.

–As far as the stock market is concerned , there are a lot of green numbers on the screen this morning. But they aren’t huge numbers. This $600 billion announcement was in the Goldilocks spot – not too large, not too small…just big enough to please the market without being so big it scared anyone about how inflationary it really is.

–Please note that the Aussie dollar moved above parity on the Fed move and stayed there. Is parity the new normal for the Aussie? Maybe. Speaking for ourselves, we’ve been waiting for a big correction in silver and gold to add to our precious metals holdings. But it just hasn’t come yet.

–What could this mean? It could mean that the inter-market relationships that seemed to govern the movement of the Aussie dollar, the U.S. dollar, and precious metals prices are breaking down. The greenback is getting weaker relative to everything else. The Fed contributes to this with its march to restore monetary insanity. Two years of grid-locked Washington dealing with a fiscal nightmare probably add fuel to the dollar’s fire.

–By the way, the real amount of QE, when you add in the Fed rolling over mortgage purchases, is closer to $900 billion. That’s almost enough to start a new war. But what’s a few hundred billion here and there when it’s not real money anyway?

–Ka-pow! Take that Foreign Investment Review Board. Giving Australia a taste of its own medicine (usually dished up for state owned Chinese enterprises seeking more than a 15% equity stake in Aussie firms), Canada has blocked BHP’s $39 billion bid for Potash Corp. And the Canadians are usually so nice to everyone.

–The man who made the decision on behalf of the Canadian government – Industry Minister Tony Clement – said the deal did not pass the “net-benefit” test. It’s hard to say what that means because the test is a secret. So you’ll just have to accept that Canada’s government has decided selling a strategic asset, even to the charming and dapper Marius Kloppers (who is not Chinese), is not in Canada’s national interest.

–Ah, the old “national interest” card. Expect to see that one get played a lot more. Globalisation is now delivering unwelcome ugly shocks to the Western world via persistent wage deflation and the purchase by cashed-up multinationals of “strategic assets.”

–Food is clearly not just what you eat; it’s a strategic asset too (so is fertiliser.) The United Nation’s Food and Agriculture Organisation (FAO) says the current rise in food prices closely mirrors the rise in 2008 that triggered riots in the streets in certain places across the globe. Uh oh.

–According to the Financial Times, “he FAO said its price index, a basket of wheat, corn, rice, oilseeds, dairy products, sugar and meats, jumped last month to 197.1 points – up nearly 5 per cent from September and the highest level in more than two years. The index has now surpassed the levels seen during the early stages of the 2007 food crisis, and it is only below the peak of the calamity between February and July of 2008.”

–This is what’s different about this latest round of Fed easing. In the U.S., Fed policy hasn’t revived the economy at all. But around the world, the money torrent is leading to speculation AND soaring food prices. This means the rest of the world must decouple from U.S. monetary policy and diversify foreign exchange reserves to compensate for planned U.S. dollar devaluation.

–In the meantime, Australian politicians are arguing about bank profits.


Dan Denning

From Daily Reckoning Australia

Dan Denning
Dan Denning is the Editor-in-Chief of The Daily Reckoning Australia and the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 as a small-cap analyst. From 2000 to 2005 he was the managing editor of Strategic Investment, where he recommended gold and warned of the US housing bubble. Dan has covered financial markets from Baltimore, Paris, London and, beginning in 2005, Melbourne Australia, where he is the Publisher of Port Phillip Publishing. To follow Dan's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

5 Comments

  1. masalai says:

    add to your closing line:
    “And doing their best to emulate the USA by ‘SCREWING the little man of his last red cent’…”

    ELIMINATE the need for all bureaucrats… There are more than enough other parasites to contend with in the Global Economic Crisis generated, era of turmoil and uncertainty…

    ‘Lies’ come from politicians and are spread by bureaucrats.
    ‘Witchcraft’ is the old name for economists.

  2. Michael says:

    –In the meantime, Australian politicians are arguing about bank profits

    Amen to the thought behind that sentence !

    What was the significant event that happened Jan 1 , this year ? The one that no pollie here talked about.

    As a society, we are easily distracted.

  3. Ross says:

    Market price commodities up 2-6% in a day and the carry trade AUD is up 1%. Looking at it from that perspective (like a horse race) measures the US bankster “risk” takers more accurately. If they that use Ben’s liquidity to trade both through Aussie XMJ equities and get the daily double it still matters which of the two comes past the post the strongest.

    If you have no confidence in helicopter Ben’s drop in shifting the US economy and increasing base demand in the real economy, and think that the liquidty is already escaping into carry trades then you might consider taking a piece of the USD bull option with long dated UUCP calls again.

    It may well be time to sell those kiwis again in a few days but the trade duration could be a little longer for increased reward this time.

  4. Anthony says:

    Could someone please explain how this money is finding its way into the stock market. I was under the impression that the buying of treasury bonds is necessary to fund the massive deficit the US government is running (about $1.2T or $100B a month when I last checked.) I’m presuming that the purchase of US bonds is no longer an attractive option for anyone other than the good old Fed.

  5. garyb says:

    The old adage that the only interest that nations have is self interest, is clearly on display. The US’s self-serving manipulation of its bond market and the dollar is a prime example. Where are Bill Bonner’s “bond vigilantes” who, in the good old days, would have stuck it to the US Fed by dumping US bonds. Where are the Chinese?

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