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FYI

The Monday Report
FNArena News - September 17 2012

By Rudi Filapek-Vandyck

I make no qualms about it, I was surprised by the announcement of an All-In QE3 on Friday by the US Federal Reserve. A bit like 98% of all market experts and participants, I guess. But then I wasn't. Let me explain.

From where I am sitting the so-called US economic recovery was never on a solid footing post 2008 and it hasn't been to this day, even though so many people the world around wanted to see a self-sustaining recovery. You'll probably remember how I tried to pour cold water over red hot running market sentiment at the start of this calendar year, when all that was happening was unusually warm weather that compared itself with an unusually cold winter the previous year.

In recent months I became quite concerned as the indicators and economic insights I was looking at were clearly trending south. So no guessing as to why Chinese data eventually gave in too. It's all intertwined nowadays.

See, also "How The GFC Morphed Into A GFZ"

Clearly, the Federal Reserve has been watching those same indicators with that same uneasy feeling in the gut, to put it in a very simplistic manner. Which is why we've seen a much Bigger Bazooka than most out here in the real world had been expecting.

Make no mistake. Be it for the better or for worse; Friday's announcement by the Federal Reserve is yet another historic move in what can easily be described as the Biggest Monetary Experiment in Human History. These are times over which academics will quibble for decades and scholars will study and study and come to diverging conclusions.

What is extremely disconcerting is that people such as David Wessel, the economics editor of the Wall Street Journal, have been giving presentations across the globe this year showing their inner circle of academics and commentators that the underlying situation in the US is far worse than it is in any of the Southern European countries. Yes, you can read that last sentence again. It will remain as is.

Another picture that has emerged out of all data and charts I have been glancing at over these past months is one whereby corporate America is seemingly sitting on Mount Everest with records amounts of cash, all-time high profit margins and share prices that are almost back to where they were at previous peaks, but Mainstreet America is out of a job, in a disability pension, on food stamps, working for less (in real terms) and seeing its wealth and savings eroded by Federal Reserve policies.

I'd be inclined to think we will see the return of the Occupy Wall Street movement at some stage, but this time with more gusto and with more social leverage.

And yet, one obvious question stands out: if my view was correct in that the US economy was looking rather wobbly instead of increasingly solid, was that really so bad as to warrant such a Big Bazooka announcement? It's not like anyone was expecting a return to Lehman-failure days and at the end of the day, no matter what actions will be taken, the Fed will not be able to eradicate ups and downs of the economic cycles.

It's here where this matter becomes "interesting". What does this tell us?

To some experts, Friday's announcement marks the victory of Nobel Prize winner Paul Krugman's idea of an "irresponsible" Fed who conveys the message to all market participants it will leave zero interest rates and abundant liquidity in place for much longer, even after economic growth has solidified. Just like Ben Bernanke cut his academic teeth on causes and solutions for the Great Depression of the 1930s, Princeton professor and former Reagan administration official Krugman spent a lot of time analysing what went wrong in Japan since the Lost Decades kicked in.

Krugman's conclusion has been that low interest rates and Quantitative Easing in itself weren't enough: the central bank must "commit to act irresponsibly" and the way to do that is by convincing consumers and businesses it will fire up inflation and allow its flames to go higher. It is not difficult to see how this line of thinking has now entered the highest echelons at the Federal Reserve.

If successful, Friday's policy announcement will be a game changer. It means, as Dennis Gartman pointed out in his newsletter on the day, a new era has opened up and its new label will be "inflation".
 

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