We could say that while the conditions for QE3 aren’t here (yet?), I think there is a high probability the United States will continue to grow, but at a substantially slower rate than we were used to in the past.
Atlanta Fed President Dennis Lockhart commented: “I don’t think QE3 will be necessary. I think we're going to see this modest, moderate but continuing pace of growth that doesn’t require further stimulus.”
Federal Reserve Vice Chair Janet Yellen said: “Looking forward, I unfortunately can envision no quick or easy solutions for the problems still afflicting the housing market.”
And finally, Philadelphia Fed President Charles Plosser said: “Policy makers need to do all we can to ensure the public’s expectations of inflation to remain stable.”
Plosser also said he favors faster tightening of monetary policy if possible. “My prediction is to normalize faster rather than slower,” he said.
So for now, a key question for investors could be whether we will be seeing some kind of a replay of the second half of 2008 or if we’ll see a replay of 2010. Both scenarios showed which radically different paths of the dollar took in the second half of each of those years.
I’m still convinced we are on our way for a replay of what happened in the second half of 2008. Let me explain for a moment.
Crude oil prices remain at high levels; forex reserves continue growing globally at a similar pace as in 2008 and the euro remains relatively well supported, at least for now, as markets still don’t seem taking seriously “yet” that some form of a Greek “restructuring equals default” and its unavoidable broad contagion is still in the cards.
Even the dollar/Japanese pair has provided a striking replay of what happened three years ago with on March 16, seeing a dramatic move lower in an eerie echo of the price action we saw at that same period in 2008 that coincided with the collapse of Bear Stearns.
At the same time, we see the Chinese equity market struggling as the PBOC, China’s Central Bank, continues to fight high inflationary pressures. The Baltic Dry Index, which tracks worldwide international shipping prices of various dry bulk cargoes, stands at less than half the level it did a year ago.
Meanwhile, just beneath the surface but extremely lethal, we have debt crises brewing in the United States at an institutional level and the peripheral eurozone nations at a sovereign level.
If that all wasn’t sufficient enough, U.S. employment remains worrisomely weak and in the troublesome peripheral eurozone countries, we have unemployment at near catastrophic levels.
And if any confirmation was needed, high oil and food prices are clearly taking their toll on consumption and business confidence despite an extended period of ultra easy monetary policy settings.
So, when we look back to the summer of 2008, we saw investors reacting to this set of circumstances by becoming increasingly risk averse and, as a result, funding currencies such as the dollar began to come back into favor. I expect this to happen again.
Now that QE3 is apparently off the table (at least for now), it seems to me that we won’t have a replay of 2010, which favors some kind of a replay of the 2008 scenario. Of course, we’ll have to wait and see as always.
There are only about six percent dollar bulls at this moment as reported by “Daily Sentiment Index.”
I stick with my contrarian position of favoring the dollar for the moment. Please don’t misread me, I’m not a long-term dollar bull, but first I expect a rebound, something similar to the second half of 2008.
I remain favoring the Swiss franc and gold. Yes, I try to keep it simple. In my opinion, with these three options, whatever could happen, it will be difficult to get wiped out.
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