Fed backs off on quantitative easing
Quantitative easing (QE) has been referred to by some economists as the last vestige of an empire in ruin. The idea is to create money, suppress rates, promote liquidity and watch inflation spread. It’s like a plumber who tries to fill a bathtub by pouring in massive amounts of water, without plugging the drain first. According to CNBC, however, the Federal Reserve is reaching toward turning off the tap, and investors have decided to cut back.
Fed sends S&P into downward slide
The S&P 500 was down by 2 percent this week and is in the middle of a 7 percent slide that began May 2. The loss in investor confidence has much to do with drops in a variety of economic indicators, the Federal Reserve turning off the tap being one of those. And the worst may be to come, suggests United-ICAP energy analyst Brian LaRose.
“If you look at what values have been rising over the course of the quantitative easing program, it has been merely commodities and equities, nothing else,” he said. “Reality is starting to take hold.”
Pop goes the golden goose
That reality may be that the gold and oil bubbles will pop, reports Bloomberg. That, in turn, would lead to a surge in the U.S. dollar, which has lost as much as 10 percent against other world currencies since the last time Ben Bernanke and the Fed boarded the QE bus.
The possibility of further bailouts for debt-ridden Greece has dragged the euro down, as has the lack of a unified financial plan between euro-zone nations. The indecision has been less than inspiring to global investors.
In the U.S., consumer worry continues to spill over into the housing market. If people aren’t spending and housing prices continue to fall, the path of disaster for the U.S. is clear, says CNBC.
Finding the bottom with both hands
While analysts like Richard Ross claim that the U.S. economic fix is only beginning to take hold and that, as investment strategist Jeffrey Saut puts it, the market is “bullishly configured” as long as the S&P holds around 1,250, the naysayers remain out in force.
“We have mountainous inflation efforts in place with historically low yields and strong demand for bonds. That’s like a rubber band that’s going to snap at some point, and somebody’s going to get hurt,” says Bill Larkin, portfolio manager at Cabot Money Management in Salem, Mass.
In order to find out where the economic slide will stop, investment firm manager Abigail Doolittle believes the Fed should do much to strengthen the dollar and allow rates to rise. The effect will be slow but lasting.
“Force investors off of the liquidity high of the last few years, and replace immediate-term gratification with the long-term satisfaction of investing in an economy with a truly solid foundation,” she said.