QE3 Now Guaranteed?

I’ve said several times that there will be no end to quantitative easing since we haven’t addressed any of the issues that got us in trouble in the first place. In a lot of ways, the problems are even worse: our debt is bigger, “too big to fail banks” are bigger, the unemployment rate is higher, and positive equity has turned into negative equity for countless homeowners.

With the weaker than expected unemployment report, the extension of quantitative easing is a much bigger possibility. We are approaching a presidential election, and the pressure on the Fed to keep the economy afloat will be intense. Unemployment benefits are running out, and this will be a huge dilemma for states with serious budget issues. Baby Boomers are retiring en masse and the stress on the Federal budget will be tremendous. The logical reaction to these trends is to extend quantitative easing and devalue the dollar.

V-Shaped Recovery?

How foolish do the talks of a V-shaped recovery back in 2009 look now? At the time, I said that people were focusing way too much on the sharp rally in the stock market and that stocks were not a leading indicator. Since 2009, stocks have more than doubled and our economy has essentially gone sideways. Leading indicator? Yea right. In 2007, the stock market was hitting new highs right when the recession began. Leading indicator? You must be kidding me.

I’ve long believed the crisis would play out like this: weakening economy, more quantitative easing, weaker dollar, then higher asset prices and a “false” recovery. The weakening economy part of the equation appears set in stone. Now it is time for Helicopter Ben to do what he does best, which is devalue the dollar.

Rising Assets, Falling Confidence

If you haven’t noticed, asset prices have risen while our economy and public confidence have faltered. There is plenty of room for confidence to fall with the guaranteed contraction in the public sector and the continued pressure on housing. The fundamentals for gold get stronger by the day as it is the only asset that truly shines when confidence wanes. I always thought the 2nd half of 2011 into 2012 would be when things started getting interesting. We’ll just have to wait and see how this plays out.

QE3 Now Guaranteed? is a post from: Expected Returns

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