This isn’t 2010 when the Fed could launch a new QE program without any real political consequence. Bernanke is going to be lumped in with Obama and used as a political tool for the 2012 Presidential election. We’re already seeing signs of this now and the election is still a year away.
Remember, Obama was the one who re-instated Bernanke. This fact will be used in the debates and during the political process in general. Not many commentators noted it, but the political tide turned with QE 2 when public consensus went from “the Fed is saving the world,” to “the Fed has blown up the cost of groceries and energy.”
Going forward, no one will buy the idea that QE is going to help the economy any more. That kind of argument works in an environment without any approaching elections, but we’re no longer in such an environment: within 14 months people will be voting.
If you need an example of what I mean, take a look at Angela Merkel in the German elections. Her party has been getting absolutely destroyed. And the primary reason is her backing of the Greek bailouts (56% of Germans say the Euro has brought them disadvantages).
Bernanke cannot simply launch QE 3 as he pleases anymore. In order for QE 3 or something like it to be unveiled, we’re going to need to see either:
1) A MAJOR bank fail
2) A full-scale Crash with the S&P 500 sub-1000
Put another way, the Fed’s tools (QE and otherwise) are now going to be implemented to “avert catastrophe,” NOT to “improve the economy.” The bulls don’t want to hear this but it’s true. The game has changed dramatically in the world. The next time the Fed acts, it’s going to be in reaction to some BAD happening.
So if you’re banking on QE 3 now, you might be in for a big surprise to the downside. The market rally last week was the start of end of the month performance gaming, NOT the market believing QE 3 is coming in a few weeks time.
However, regardless of when or if QE 3 comes, the fact remains that the financial markets are on DEFCON Red Alert today. Indeed, I fully believe we have entered the Second Round of the Great Crisis: the Sovereign Default Round. The First Round (2008) was just a warm-up. This time around, we’re going to see entire countries go bankrupt along with stock crashes, civil unrest, food shortages, bank holidays and more.
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