Tags: Advani | QE3 | fear | waste

World Fears Defeat Bernanke and QE3

By Ashish Advani   |   Wednesday, 26 Sep 2012 10:43 AM

As we have all learned by now, the Federal Reserve unleashed the third round of quantitative easing (QE3) on Sept. 13. Not only did Fed Chairman Ben Bernanke decide to not take away the liquidity sloshing around in the world, he actually decided to juice it indefinitely and throw the whole bar into the punch bowl.

The key factors that make QE3 different from others is that there is no limit or date attached to this round of bond buying. Taking a page out of the European Central Bank program of the week before, the Fed also decided to end the risk of criticism each time it introduces a new QE program by making this one indefinite.

The amount of QE3 is unlimited and the term is “until we see improvement in economy.” WOW! This could be the final nail in the coffin for turning the United States into Japan, which we have been trying to skirt around. Goldman Sachs has estimated that QE3 could have a final bill of well over $2 trillion.

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Each time a previous QE program was announced, the stock markets rejoiced and soared. Those programs were finite and had monetary and time limits. Yet, the markets soared for weeks after the introduction of the fresh funds. Mind you, I am not saying that QE has been useful for the economy, it was just monetary drugs for the stock markets to party.

Yet, this time, with such a potentially unlimited program, the stock markets have shrugged off the event. After the first day of surge, we have seen a lackluster move in the global markets. If anything, after the one-day party, worries and gloom have enveloped the global stock markets again.

Bernanke has acknowledged that QE3 might not be the most effective tool for job creation or improving the global growth stagnations. And yet, inexplicably, he went ahead with the program anyway. So, the main reason for QE3 was to increase the stock markets and get the general “feel good” feeling going, which will somehow translate into confidence and business growth.

The world thinks otherwise, Bernanke. I could pull out an empty chair and start berating Bernanke, but I suspect that routine is already getting old now.

The world is fearful and this extra liquidity has not helped.

In a recent State Street Bank global survey, more than 70 percent of the respondents indicated that they fear a “tail-risk event.” In simple English, the global markets fear an external catastrophic event that will crush any recovery we might be seeing, if there is any.

The biggest fears that plague the world are:
• Failure of the euro currency
• Fiscal cliff occurrence in the United States
• Crashing of the Chinese economy (or lack of growth rates back to 9 percent)
• Oil shock due to geopolitical unrest, such as Israel attacking Iran
• Another major bank failure, such as Lehman Brothers back in 2008

As you can see, this is a long list of worries, and while I can agree maybe two events and not the others will occur, I suspect the world will continue to worry until such events are eliminated.

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As a result, we will not see a surge in the stock markets, and due to this, the up to $40 billion monthly purchases that the Fed has started with QE3 will be a total waste of money.

We need to follow real growth and real returns using instruments that have not become overpriced. Buying U.S. Treasurys and bonds or defensive stocks in the United States that pay dividends is a flawed strategy and we need to get creative here.

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