Ralph Shell @ 1:28 PM, Thursday November 04 2010
Initiation of the QEII caper, $100B per month plus another $25/50B per month to replace existing debt that is maturing has been well received by the equity markets. And why not? Part of the Bernanke theory is that higher stocks will make the brokers, bankers, and money class wealthier, increased spending will result, fueling a recovery, and everyone will feel better. Besides they will get their cut from marketing and trading another $1T.
There are some knowledgeable observers who take issue with the Fed Chairman. In a Seeking Alpha Article this morning entitled Bernanke Admits Targeting Stock Prices, Michael "Mish" Shedlock writes:
"Fresh new bubbles in stocks, junk bonds, or commodities will not create any jobs.
In fact, rising commodity prices based on speculation and misguided attempts to force the CPI higher will cost jobs. The reason is so obvious that only a monetary crank trapped in academic wonderland cannot see it."
This morning Bernanke wrote in a Washington Post Op-Ed piece:
"The Federal Reserve’s objectives – its dual mandate, set by Congress –
are to promote a high level of employment and low, stable inflation."
Recently the price of corn, a mundane commodity hardly worth study by a learned Ivy League PhD, has gone from 4.00 to 6.00 per bushel in 2010. Since an increase of a pound of the live weight of cattle requires 2.6 pounds of corn of per pound of gain, 3.6 pounds of corn for a pound of gain in a hog, and 2.0 per pound of gain in poultry, the price of meat is headed higher. Higher wheat prices, $7.00 per bushel, up from $5.00, will make bread and cereal prices soar. To importing countries, however, the cheaper USD helps stimulate export demand, probably sending prices even higher. American farmers, perhaps 1 or 2% of the population will benefit, but again the consumer on Main Street will take it on the chin. Is this what Bernanke calls stable inflation?
The US consumer also has to contend with the rising price of petroleum, caused in part by QEII which has resulted is a weaker USD. Today crude oil topped 86/barrel, the May high. While gasoline prices might not mean much to those on the east coast where the distances are shorter and public transportation is available, the price of fuel is of great importance for most of the country. Each increase in the price is a stealth tax on those that can least afford it, hindering economic recovery.
The chances are Bernanke is going to have his objectives fulfilled, and inflation will be revived. Like a wild fire, inflation is hard to contain once started. Since food and energy are not part of the 'core inflation rate' Bernanke might deny it is happening, but this will only illustrate how out of touch Washington is with Main Street. If QEII fails to benefit all of the US, the day will come, perhaps fairly quickly, when the independence of the Fed is challenged.
The currency markets act like the Fed's QEII was not fully in the market. Where do we trade from here? Will bad economic news continue to be bearish on the USD? Perhaps we will get a clue with tomorrows NFP number. And what about the Japanese and their efforts to weaken the yen's value? Is the Chinese growth going to continue, and with it, their demand for Australian coal, iron ore, gold and wheat?
Perhaps there is a trade, long the AUD/JPY. Currently this pair is trading at 81.72 and seems to be trying to break above the resistance of the last six weeks. We have had a cross over on the MACD signaling a buy. Is it possible this pair can run up to the 87 level. We may try a scale into the long side of this pair, because we fear our buy ideas in the 80.50 81 area will not be filled.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.