Markets' Focus On Quantitative Easing Overlooks Other
October 2010, 12:34 p.m.
By Debbie Carlson
Of Kitco News
News) --The financial markets have been focusing
on the likelihood of a second round of quantitative
easing from the Federal Reserve in November, yet some
market watchers wonder if there are not other factors
that could influence trade.
and equity markets have been rallying on ideas that
the Fed will pump more liquidity into the system with
quantitative easing, perhaps as soon as the next Federal
Open Market Committee meeting in early November. That
meeting ends after the mid-term election, so any action
taken won’t skew the outcome. Expectations are that
the Fed could inject perhaps $500 billion over time,
much less than the first round of easing.
market watchers wonder if issues like the uncertainty
with U.S. home foreclosures might not turn the view
of investors back to other problems after any Fed move.
Last week, when it was discovered that several banks
had signed off on thousands of foreclosures without
reading the documents, shares of bank stocks fell. Bank
of America, which bought the beleaguered mortgage giant
Countrywide, is getting punished most for what’s being
called “robo-signing.” While some homeowners are victims
of fraud, others may be using this loophole to delay
analyst at MFGlobal said the news could be positive
for gold if it becomes a focus for the trade, especially
if gold is seen as a safe-haven. He said holders of
mortgage-backed securities like Pimco and the New York
Federal Reserve and six others joined to sue Bank of
America to repurchase $47 billion in mortgages because
of fraud allegations in the re-packaging process.
may be perceived as another wealthy Wall Street type
seeking a bailout from its bad bets. It may also be
positive for gold because the sharp degree of weakness
in bank stocks witnessed in May and June was caused
by concerns over banks’ holdings of Greek debt,” he
said. “Now concerns center around banks’ holdings of
mortgage debt, which could again benefit gold again
if safe-haven comes back into play.”
of Hackett Financial Advisers said there’s a very good
chance that the market will start to focus on something
else. “The basis for QE2 is that the economy is in shambles.
The first QE didn’t do the trick, which is why this
one is taking place. If we had a booming economy we
wouldn’t need it,” he said.
He said the
foreclosure uncertainty could be an issue if left unresolved.
Given that stock, commodity and bond prices are all
rising – which is not normal – something like a revisiting
of bank debt could be the factor that causes these markets
to diverge. “Something is going to crack it,” Hackett
said while the impact on banks might be limited, it
could easily hurt the shaky housing market further and
could weaken the U.S. economy again.
initial reaction to this event is likely to see the
Fed printing more money weakening the (dollar). However,
this interpretation could be misleading regarding the
potential risk impact should the US economy slip again.
The (dollar) short position is significant…. Hence,
a decline of shares will see investors liquidating carry
positions, pushing volatility up and the (dollar) higher,”
And a higher
dollar would cause gold to swoon. “Look at how sensitive
gold was Tuesday, falling $40,” Hackett said.
think that issues like the robo-signing are just small
events that might have a short-lived impact on financial
markets and that the Fed’s actions will continue to
reverberate. “People are really worried about the size
of the U.S. government debt, not the bank debt,” said
Jim Smitherman, commodities broker at Coquest.
while commodities and equities have both risen on the
back of another round of liquidity injected into the
global system, that’s also keeping a lid on equities.
“They’re keeping us from failing, but they’re also not
letting the market do the job its needs to do to take
care of this problem on its own. It’s also keeping the
dollar down, days like Tuesday notwithstanding,” he
said, commodity prices as a whole will rally for at
least another six months if the Fed eases. “People will
still want hard assets until they’re convinced the Fed
has stopped printing money,” Smitherman said.
senior financial analyst at Archer Financial Services,
said while the impact of the robo-signing will linger,
the concerns over it are diminishing already. In fact,
he thinks because the economy is growing and the low
interest rate environment, equity markets will continue
If the Fed
signals at the next FOMC meeting it will ease, gold
should take another real leg higher into year end, with
a move to $1,500 an ounce, said Spencer Patton of Steel
Vine Investments. “The market will always be thirsty
for more Fed action.”
How the world
reacts to any easing by the Fed is key, Patton added.
“If China decides to incrementally start buying gold
in place of the disaster that is U.S. debt denominated
in U.S. dollars, gold will have a floor that will last
all year,” he said.
the road, Hackett said the problem will come if the
second round of easing doesn’t boost the economy. “If
printing money doesn’t work, the question is what will
be what do we do now? There is no Plan B,” he said.
“That’s when the markets will lose all faith in the
Fed. They’ll have a failed policy.”
He said with
a failed policy the Fed will have to reassess what to
do if printing money is no longer an option. That could
cause investors who have purchased gold on the idea
of the Fed printing money continuously to reconsider
those positions. “They’ve been a significant buyer of
gold,” he said.
he said, if the Fed’s hands are tied, it could lead
to deflation, which would pressure all asset prices,