Thursday July 04, 2013 09:29
Bernake sets a potential timeline for the end of QE, sending gold, stock and bond markets reeling.
If this keeps up, the Fed will realize that the U.S. economy is unable to stand on its own without the crutch of QE.
There’s never been any doubt, at least in these quarters, as to the markets’ fixation on the Fed’s quantitative easing program. But the extent of that fixation — as evidenced by the reaction to
Chairman Ben Bernanke’s postmeeting statements on June 19 — has still managed to amaze.
Essentially, correlations amongst markets have once again gone to one, as investors have stampeded to the relative safety of the U.S. dollar.
What sparked this conflagration? Like a good arson investigator, we can quickly find the cause in one short but inflammatory comment by Bernanke.
The Fed’s policy statement itself was non-eventful — the Fed governors didn’t mention or even refer to any tapering or moderating of QE. That all changed when Bernanke sat behind the podium for his press conference, however.
In his prepared statement, Bernanke noted that:
“If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.”
And thus it began.
For the first time, the Fed laid out a timeline for the end of QE. Gold, which had been trading up about $6.00 before the press conference, quickly dropped to a $17.00 loss in the little remaining time in the trading day.
The real bloodbath — for gold and the rest of the asset classes — came the next day, as the world’s investors came to grips with the reality that the age of QE was going to end.
Over the two-day aftermath of the Fed meeting, gold gave up about 100, silver dipped below $20, the Dow lost over 500 points, bonds in Europe fell 7% and the yield on the U.S. 10-year climbed to just under 2.5% (and subsequently leaped above the key benchmark).
It was a rout. And at this writing more than a week later, the markets are still being roiled by volatility. Gold, in particular, is trading even lower — and equities are rising — on a growing consensus that the U.S. economy is firmly on the path to recovery.
The nearly 18% leap in 10-year yields over one week was the largest in at least 72 years. The significance of what we’re going through right now, as the recovery from the Great Recession continues to creep tentatively ahead, as investor sentiment whipsaws from expectations of economic growth one day to fears of deflation the next, cannot be overstated.
In short, the U.S. and global economies are addicted to the drug of money printing, having developed a tolerance to the effects but an ever-greater dependency. The central banks are the pushers, threatening to withhold the supply... and panic is setting in.
By Brien Lundin
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