The Final "Tell"

Today the FOMC's (Federal Open Market Committee) comments following its notice not to change US interest rates, marked the point at which it would not step onto the path of a harder currency in the way they so strongly urged the EU countries to do. It is also politically opposite to the effect implicit in Tea Party people talk - I say 'effect' instead of 'policy' because I do not believe the TP actually has a policy or understands the implications of what it says.

Regardless, the FOMC comments opened the way for an imminent return to QE2, or the second coming of the Quantitative Easing experiment. When this happens, it will be a point of no return. The Bernanke-Geitner duo will speak and it will happen. As I said in an earlier blog, this was first tried years ago by Japan and is given prominence for that country's economic "lost decade".

As a backdrop, the predominent recent US guru wisdom has been that there would be no "double dip" in GDP, just slow but steady growth. By Sept 20 a wrench seemed to be thrown into that scenario when the Fed announced that the decline had ended a year ago! As Obama was politely asked that same day on TV by some of his most supportive public, to be told now that this was a year of recovery after bailouts, QE1, etc was scarcely credible.

Whispers had been saying the amounts deployed were not big enough. Now the result was clear. Even the slightest future downtick would put "double dip" in play. And as we have said before, the only tool left to the Fed and Treasury would be QE2.

The anointed god of bonds, Bill Gross of PIMCO, was already standing by on CNBC. Within a minute after release of the FOMC statement, Gross said it could only mean a decline in the dollar*. Almost simultaneously, charts of spot gold spiked to a new current high approaching $1,290/oz, while the US dollar abruptly commenced a renewed stage of its fall. Stock markets rose in unison. However, before the day's close at 4pm, the market began to reassess the consequences. By 5pm, Larry Summers, Director of the Obama Council of Economic Advisors had announced his resignation.

If QE2 does happen, new consequences being unleashed by the "solution" will eventually have to be fixed. An important part of those problems will occur in non-indexed public and private pensions as yields disappear and fixed incomes progressively fall. The fix is unlikely to be pretty. When rates rise - which will happen again at some point - bond values and pension assets will be crushed.

Whatever policyspeak may sound like, investors should instead take what it says on the cop cars as the greater reality -"Deeds Speak".


* His unspoken message (known as "talking your book"): Get out of your weak cash and into the safety of US Treasuries. He may not tell those same potential investors when to get out, until PIMCO has already vacated stage left at a profit. PIMCO is the world's largest bond investor.

James Carville, Bill Clinton's famed campaign manager is reputed to have joked "Once when I was asked what I would want to be if could have all the power in the world I would have said "God" - now I would say a bond fund".