Tuesday, June 5, 2012
The Fed's plan is coming together.
It needs an excuse to announce a new round of quantitative easing (QE). Politicians need an excuse to goose the stock market higher in time for the November elections.
The "Excuse Fairy" arrived last Friday...
The dismal jobs report number spooked investors and pushed the stock market all the way back down to where it started the year. Now the public is begging for another round of quantitative easing. "The economy is slowing," all the TV talking heads proclaim. "We need more stimulus."
What a difference a year makes...
Remember last April, when the second round of quantitative easing was coming to an end? Most of the talking heads were convinced we'd get a third round... But they were wildly opposed to it. Stocks were rallying. The economy appeared to be improving. And there was no need for more stimulus. We all knew we were going to get it anyway – because once you start down the money printing path, you can't ever turn back.
It seemed everyone was opposed to QE3, but everyone expected it to happen anyway.
We saw things a little bit differently. Last year, we argued the Fed was in no hurry to announce QE3. Fed Chairman Ben Bernanke got no credit for the economic recovery. He had been so vilified for dropping dollar bills out of helicopters, we argued QE3 wouldn't happen until the public begged the Fed for more.
The begging started on Friday, and it's going to get louder over the next month or two. But don't worry... The Fed will come to the rescue and we'll have a new round of quantitative easing announced sometime next month. I'm convinced of it.
You see, it has to happen. There is no way out of this fiscal game of musical chairs. And we're running out of chairs to sit in. The only way to keep the music playing is to print up a few trillion dollars every now and then and funnel them into the economy.
But you have to get the timing right... It's all part of the plan.
Based on past experience, we know stocks rally immediately following a quantitative easing announcement. The first stage of the rally is fast. It creates large gains. And it usually peaks in about three months.
We also know public sentiment improves as the stock market rallies. As public sentiment improves, so do the chances that the folks in Washington will hang on to their jobs.
Mid- to late-July is the perfect time for the Fed to start dropping dollar bills out of helicopters again. It'll spark a stock market rally that improves public sentiment just in time for the November elections. In fact, it wouldn't surprise me to see another global coordinated effort to inject liquidity. The Fed, the European Central Bank, the Bank of Japan, the Bank of Canada, the Bank of England, and Fred's Sidewalk Bank and the Hot Dog Stand of Saskatchewan will all announce some form of quantitative easing at the same time.
That's how the game is played.
It's not a fair game. The Fed is punishing savers and rewarding folks who borrowed over their heads.
It has been almost four years and countless trillions of dollars since the Fed announced its first QE program. Since then, we've paid off bankers' bad debts. We've bailed folks out of their mistakes. And we created a penalty-free environment for stupidity.
Meanwhile, we punished the folks who did everything right. Savers earn nothing on their bank deposits... And the purchasing power of their savings falls further every day.
I hate that my lifetime of hard work and diligent saving is being eroded by the Fed's willingness to debase our currency to bail out morons. But as I tell my sons when they're playing baseball and the calls keep going in favor of the other team... your job is to find a way to win anyway.
If you're playing in a rigged game, your job is to bet on the side of the riggers.
The riggers are going to give us another QE program in July, and they're going to create a stock market rally heading into the election. You need to buy stocks on weakness over the next few weeks.
As of Friday, the stock market is back down to where it started 2012. This is the decline we've been looking for since March. Take advantage of it.
Best regards and good trading,
In April 2011, with QE2 set to end in June, Jeff was sure Ben Bernanke wasn't going to immediately roll out a third round of money printing. "We're not going to see a QE3 program until we get a glimpse of what life is like without daily injections from the Fed," he wrote. "Maybe then the pundits will show a little appreciation for the market's drug dealer." Read Jeff's prediction here: How Ben Bernanke Could Crash the Stock Market.
"Long-term investors should heed Wall Street's warning to 'sell in May and go away,'" Jeff wrote in April. "Enjoy your profits so far this year. Take a few months off." He was right: after climbing 11% from January to April, stocks were down more than 6% in May. Read more here: Consider This Before You "Sell in May and Go Away."
Big utility fund XLU is up 3% since April... meanwhile, the S&P 500 is down more than 9%.
Pipeline swoon continues... Benchmark Alerian MLP Index is down 12% in four months.
Natural gas royalty trusts are getting hammered... San Juan, Mesa Energy, Sabine, and Permian Basin are all down 25%-plus in two months.
Giant oil producer ExxonMobil hits a six-week low... U.S. crude oil prices are down 19% since April.