‘The biggest even this week is Ben Bernanke’s Jackson Hole Speech which
will take place on Friday August 31. It was at Jackson Hole in 2010 that
Bernanke hinted at QE 2. With that in mind, many investors believe that the Fed
is about to unveil or at least hint at a similar large-scale monetary program
this Friday.
We, at Phoenix Capital Research, disagree for three reasons. Number
one, stocks are at or near four-year highs. With stocks at these levels, there
is little reason for the Fed to use up any of its remaining ammunition.
Secondly, food prices are soaring due to the worst drought in 56 years.
Some 63% of the lower US 48 states are experiencing a drought. As a result of
this, the USDA has said that 50% of the US’s corn crop will be in poor to very
poor condition. Soybeans are in similar shape.
Thirdly, gas prices are near their all time highs.
As far back as May 2011, Ben Bernanke admitted publicly that the
consequences of QE (higher food and energy costs) were outweighing the benefits
(higher stock prices).
With stocks where they are today and food and energy prices where they
are today, there is little reason for the Fed to unleash QE 3 or any large
monetary program. Indeed, if the Fed were to do so, it would most assuredly
cost Obama the election as the ensuing inflationary pressure would hit voters’
pocketbooks.
With the election less than 100 days away and Mitt Romney and the GOP
increasingly targeting the Fed and specifically Bernanke as a problem, the Fed
isn’t going to do anything that could risk Obama losing his bid for
re-election. This is especially true given that there really isn’t a sound
argument for more QE at this time: food prices, energy prices, and stocks are
high, while interest rates are at or near all time lows.
There is a fourth and final reason why QE is not in the cards. QE is a
policy through which the Fed prints money to buy Treasury or Agency debt from
the banks. The problem with this is that these bonds are the senior most assets
that the banks use to backstop their trading portfolios.
In the case of the TBTFs, these banks only have $7 trillion in assets
back-stopping over $200 trillion in derivative trades. The last thing these
banks want is to swap out their senior most assets (Treasuries and Agency
bonds) for more cash (remember the banks are already sitting on over $1
trillion in cash in excess of their required reserves).
In simple terms, the banks don’t want cash. They want bonds,
which they can use to leverage up their trading portfolios: their primary
source of revenue with interest rates at or near zero.
Indeed, Bernanke has all but admitted this recently, saying “I assume
there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies
it would hurt the market.“
Why would it hurt the market? Because the banks NEED
assets/collateral. And QE takes this out of the system.
For this reason, we believe it is highly unlikely the Fed will announce
QE at this time. There really is no reason for it to do especially since QE
would in fact hurt the big banks: the very institutions the Fed has
been trying to prop up.
On that note, I’ve already alerted my Private Wealth
Advisory subscribers to a handful of investments that
will explode higher when the Fed disappoints this Friday. It is precisely this
kind of thinking ahead and “unquantifiable” analysis that has allowed us to
lock in 73 winners and only one loser over the last 13 months. And I fully
expect we’re going to find similar success over the coming year.The reason?
Because we look beyond simple financial statements and press releases to find
the “unquantifiable” opportunities (and risks) that most newsletter firms
aren’t aware of. In today’s markets, everyone has access to the same
information, the only way you can crush the market is by seeking out the
underlying realities lurking “between the lines.” That’s precisely what we
excel at Phoenix Capital Research. And it’s why our research has been featured
everywhere from RollingStone magazine to The New York Post,
Crain’s New YorkBusiness, CNN Money, and elsewhere.To find out more about
our proprietary research methodologies and start receiving my bi-weekly
investment research reports as well as real time “buy and sell” alerts via
email, you need to take out a subscription to Private Wealth
Advisory. To do so…Click
Here Now!!!Graham
Summers