On Track For A Bond Market Panic: Election As Forcing Function

Eric Janszen / iTulip.com

Railway behind Walden Pond, Concord, Massachusetts, August 2012

• No QE3 but the Fed throws Bill Gross a bone
• The world’s largest public housing project
• When is a bond not a bond? When it’s money.
• Who just bought a pile of gold?

CI: Hope you enjoyed your summer.
EJ: I did, thanks. Hope did too and took my advice from June to rest up. I’m expecting a long, cold winter.

CI: For this interview we’ll cover the state of the U.S. economy, talk about the Fed and QE, gold, housing, and the state of household balance sheets here in Part I. In Part II we cover a smorgasbord of topics, ranging from the euro to Peak Cheap Oil and conclude with your ideas about how the 30 plus year bull market in bonds ends (aka the Janszen Scenario). We’ll start with your June 2012 prediction for new QE3 until “The White of Their Eyes,” that is, not until a clear and present crisis will the Fed act. That is absolutely contrary to the universal belief that QE3 will be announced on September 13th. Bill Gross has staked his reputation on a QE3 announcement today. Do you still expect the Fed to hold back on the 13th? Also, after languishing in the low $1,600 range all year gold finally broke above $1,700 last week. Is that just gold hoping for more cash from the Fed along with stock market investors after the jobs report came out?
EJ: Six out of ten dentists and economists say the gold price rise was caused by the announcement of bad US employment numbers. The markets interpreted the BLS report, on top of other data that show the U.S. economy slowing, as a virtual guarantee of a QE3 announcement on the 13th. As I explained back in June, it isn’t going to happen. No Fed action before the election unless there is an acute crisis. In recent weeks the financial media has talked itself into a major announcement from the Fed on Thursday. I think Gross took the lead or has been the most outspoken. I think they are going to be disappointed. We may get a minor tweak to policy, like an extension of an existing program, but nothing new. However, the impact of that disappointment will not be the same for the stock market as for the gold market because stock prices and gold prices moved at different times and for different reasons over the past two weeks. Gold will move but not as much as stocks. Keep in mind that short-term forecasting is not my forte, but that’s how I see it.

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