- Money Morning Australia

QE: Why We Can Expect More Money Printing from Central Banks


Written on 10 April 2012 by MoneyMorning

QE: Why We Can Expect More Money Printing from Central Banks

QE is off the table – for now.

Our financial system is nothing short of absurd.

We have a global marketplace, where millions of people trade countless different products, both real and financial. You can buy exposure to virtually any economy in the world, and any asset class you like.

An almost infinite number of variables are acting on this system at any given time. Everything from the weather in Bangkok to the mood swings of European finance ministers has an effect on it.

And yet, more than anything else, the price movements across this whole elegant network are dependent on one thing: the mutterings of a small group of men in a room in Washington DC.

So much for free markets…

The Fed and Spain Spook the Market

Wondering why the wind has dropped out of the markets’ sails in recent days? It’s mainly down to the Federal Reserve.

Minutes from the Fed’s latest meeting on monetary policy came out. In short, the Fed looks less likely to print more money than investors had expected. On the news, the US dollar shot up, gold slid, and stocks took a knock too.

Even the normally ‘dovish’ San Francisco Fed president John Williams noted that “the downside risks to the US economy have lessened”, and that “the arguments for doing another dose of monetary stimulus aren’t nearly as strong” as they were for the early bursts of quantitative easing (QE).

Obviously, the news that the real economy might be improving panicked investors. If that’s true, then they won’t get any more free money to punt in stock markets.

Things weren’t helped when an auction of Spanish government debt also had trouble getting away. This was doubly painful, because the Spanish government has committed to some pretty severe austerity measures. Whether you believe the country can do it or not, it’s at least making an effort.

What’s really worrying is that, as Justin Knight of UBS tells the FT, “the international investors who have left the Spanish bond market will probably not come back”. That suggests that the poor appetite for the bonds means that Spanish banks – the main buyers these days – might be “running out of LTRO money and therefore stop buying as well”, which would be “serious news for the market”.

Are Central Banks Really Going to Pull the Plug?

What does all this mean for your money? Let’s deal with the Fed first. We’ve pointed a number of occasions that QE3 might not be quite as readily available as investors had expected.

There are a number of reasons for this. One of Ben Bernanke’s stated main goals has been to drive up stock prices, and so make consumers feel wealthier. Given the first quarter rally, he’s certainly achieved this for now.

QE is also politically questionable. We’re in the run-up to a US presidential election. It’s quite tricky for the Fed to take any steps to boost the economy that aren’t easily justifiable. They’ll get accused of favouritism otherwise.

So what it comes down to is that QE3 is off the table until stocks tank again. That’s pretty simple.

So What Could Make Stocks Tank Again?

It strikes me that two things have underpinned the recent optimism in the markets. Firstly, the signs of a nascent recovery in the US. It’s still the world’s biggest and most important economy. If the good news can continue then that might outweigh the absence of QE3.

But there’s a second issue. Everyone has effectively assumed Europe away into the background. The base case is that there’ll be a recession there, but that there won’t be a systemic collapse, because the European Central Bank (ECB) will do what it takes to support the eurozone’s banks and sovereign governments.

I don’t necessarily think this is wrong. However, I do think the market is underestimating the amount of pain it’ll take to get to that point. And that brings us back to Spain.

The ECB is walking a much finer line than even the Fed. Mario Draghi is a more pragmatic man than his predecessor Jean-Claude Trichet seemed to be. But even Draghi can’t ignore the Germans.

Currently, European monetary policy is too loose for them. German unions are getting more aggressive with their pay demands. There’s even talk of a housing bubble. But if Draghi indulges Germany, then he throws Spain (not to mention the rest of the eurozone) to the wolves.

An ugly tug of war between Germany and the rest of the eurozone would rattle markets again. And if the ECB doesn’t step in to print money quickly enough, there’s every reason to think that Ben Bernanke and his friends might be forced to instead.

So in short, I don’t think the money printing is over yet. But there may well be another plunge in the markets before we get another dose.

John Stepek

Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

Disruptive Technology Stocks For Smart Small-Cap Investors

2012-04-06 – Kris Sayce

ASX 200: This Market is Toast

2012-04-05 – Murray Dawes

Why Every Bank Will Soon Be a Tax Collector for Every Government Everywhere

2012-04-04 – Merryn Somerset Webb

Not Even Saudi Arabia Can Save Us From High Oil Prices

2012-04-03 – Jason Simpkins

Good News For Oil and Resource Investors

2012-04-02 – Dr. Alex Cowie

For editorial enquiries and feedback, email letters@moneymorning.com.au



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

MoneyMorning
At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in. Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au




GET THIS NEW REPORT : 5 Things You Can Do To Boost Your Retirement Pot


In this report we’ll give you strategies, tips and advice to help you kick-start, or revive your retirement savings right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

  • ^NDX3983.188-3.004 - -0.08%
  • ^FTSE6821.46+23.31 - +0.34%
  • ^AORD5576.600-0.200 - -0.00%
  • ^AXJO5587.100-0.700 - -0.01%
  • AUDUSD=X0.9421
  • USDJPY=X101.746

PAN [predict literally ban]

interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in
Tasmania…

 
And not just the future of Holden…but Toyota,
Hyundai and Mazda too


CLICK HERE FOR THE FULL STORY

investing success leadgen

TDR [war in the pacific ban]

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?


  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
 
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
 
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor [BANNER moonshot]

Graphic Ad 1 – Blue Chip Stocks Report


More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

You owe it to yourself take this advice. But even if I’m right and you act now, you may not be able [Read More...]

New Zealand may not be an emerging market, but it’s highly leveraged to growth in emerging markets. [Read More...]

Clearly, illegal immigrants are a headache for the government. But rather than store them on Christm [Read More...]

Don’t fear the swan. But don’t be complacent either. Acknowledge and respect that black swan events [Read More...]

So where does the trade-off trade off? How low can interest rates go before Glen Stevens’ hair catch [Read More...]

Investing part of your portfolio overseas is a vital part of proper asset allocation. It’s a corner [Read More...]

The Federal Reserve have pronounced our old friend, the credit cycle, dead. Dead...dead...stiff dead [Read More...]

Give the guy a break. Vladimir Putin is not the worst. Compared to the US, Russia has been remarkabl [Read More...]

Once your perception of inflation changes, your behaviour changes, too. Then inflation becomes a psy [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery