Has QE3 Already Begun?

As it has become clear, the Fed stands ready to act with further easing of monetary policy if economic conditions warrant it. The author however, suspects that the Fed has already begun the next round of quantitative easing and provides several explanations of why he believes this.

By Toby Connor
Sep 04, 2012 12:05 pm
Minyanville

According to recent statements by Bernanke, the Fed stands ready to act with further easing of monetary policy (QE3) if economic conditions warrant it. But let's face it: Because the Fed has never been audited, we only receive the data it deems fit to publish. Does anyone really believe the Fed is publishing true accounting numbers? I'm starting to suspect Bernanke has already begun the next round of quantitative easing.

Politically, QE is a hot potato and impossible to publicly announce. But there have been enough hints (the last FOMC minutes may have been the loudest) that Bernanke intends to print.

First case in point: The CRB exploded out of its three-year cycle low in June just as I had predicted. Oil is already knocking on the door of $100 per barrel again. In many cases, grains have rallied 50% or more and show no signs of reversing. As a matter of fact, the CRB is showing no inclination to even retest the summer bottom. The complete failure up to this point of commodities to retest the three-year cycle low is in itself a warning that something has changed. I think we can all agree that the global economy didn't all of a sudden ratchet into high gear, creating a surge in demand. Barring that, the only thing that would generate this kind of explosive move without even a hint of a correction would be another round of massive liquidity injections.

Another odd development is the action in bonds. A month and a half ago, the bond market started to discount the inflationary surge as commodities launched out of their three-year cycle low. Mysteriously, two weeks ago, interest rates started to tank.

minyanville

One has to ask: Who in their right mind would be buying bonds with a negative yield in a rapidly accelerating inflationary environment?

This sudden reversal in interest rates is another warning, in my opinion, that QE3 may have already begun, and Bernanke is already buying bonds in the attempt to hold interest rates under 2%.

The next confirmation will come from the stock market. As we have seen in the past, the daily cycle in the stock market has tended to stretch far beyond its normal timing band (35-40 days) during periods of quantitative easing. The current cycle is due to bottom right around the next Fed meeting on September 13. If stocks are still rising with no clear decline into a cycle low by mid-September, that would be a pretty clear sign that QE3 has already begun.

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