"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, May 16, 2012

Why the Delay from the Fed in Announcing Additional Stimulus Measures

With all the turmoil and commotion occurring in Europe, with slowing growth in China and with mixed signals coming out of the US, and now, especially with global stock markets reeling and talk of "US fiscal cliffs" abounding, one would expect the doves on the Fed to begin making noises and talking nicely to the investment community about future plans for additional QE measures. Some have even suggested that one of the things that the Fed also might do is to further push back their date for any rate hike until "late in 2014". For now however we are getting an eerie silence. Even today's minutes of the recent FOMC meeting are rather vague, pretty much just stating what everyone already knows - the Fed will act if they think conditions warrant them so doing. What gives?

Take a look at the following chart of unleaded gasoline which might possibly provide a clue. It seems to me that gasoline prices have become a sort of marker as this commodity is perhaps one that has the greatest impact on the general public at large since it is so obvious as price boards for it are stationed practically everywhere one looks.  Notice how gasoline prices have formed a double top on the chart above the $3.40 (these are wholesale prices with no federal or state taxes added) and have begun to come down having fallen some 55 cents or so over the last few weeks.

However, they still remain quite expensive by historical standards and are more than 16% expensive than last fall. My guess is that the policy makers understand full well that any certainty in regards to the advent of a new round of bond purchases by the Fed would turn this chart to the upside faster than one can say "Whoa Nellie".

It is very difficult to deny that while the Fed attempts to stimulate or to provide stimulus to the economy, if gasoline prices rise too highly as a result, it tends to short circuit the impact from such stimulus as higher gasoline/energy prices in general have a depressing or slowing impact on overall economic growth. I suspect that the Fed is hoping and waiting for speculative selling to push gasoline prices even lower yet so that the next round of stimulus will have gasoline prices back closer to levels seen late last year.

The problem for these Central Planners however remains the same, how do they herd speculative money OUT of the COMMODITY MARKETS and particular the ENERGY MARKETS and yet at the same time keep them from abandoning the EQUITY MARKETS? Remember, the more that people talk up the "SLOWING GLOBAL GROWTH" theme to push commodity markets lower the harder it is to justify stock prices at current levels. AFter all, what is good for the goose is also good for the gander and if the prices of basic commodities are plunging due to slowing growth concerns, then it is extremely difficult if not downright impossible to talk up the stock markets. Rising stocks need an economy that is growing and strongly rising stock prices need an economy that is growing strongly. You cannot have rising stock prices and falling commodity prices simultaneously as it is a logical aberration.

While the ESF and other entities would like to see this aberration - notwithstanding the impossibility of it occurring, if push comes to shove and they have to choose between falling equity prices or rising commodity prices, they will opt for the latter every time, particularly in an election year.


  1. Dan,

    Not sure what part of the country you live in but in northern Ca gas has exploded to the upside the last few weeks --the average price around here is around $4.35/gallon
    Just crazy with oil down over $15 you would expect gas prices to come down but not in northern Ca-just the opposite they are going up like there is no tomorrow

  2. Hi,

    I'd expect the oil price to decline quite seriously over the coming months, say down to $70/bbl or less. The Fed may have decided to wait until this has played out. Firstly, a lower oil price should eventually help the economy, perhaps more so than QE3. Secondly, if QE3 starts with oil already very expensive, it might be totally counterproductive if QE3 just increases the oil price further.

    Finally, short term interest rates have been creeping up since the end of 2011 and are now roughly stable around 0.1% for 3 months (^IRX). If the rates would not decline with the introduction of QE3, this would pretty soon translate into an increased velocity of money.


  3. No way. Go look at the monetary statistics. As Dan said they are scared of the rising bank credit, velocity and multiplier combined with QE, which they have to do or the banks will implode.

    The situation in Europe will force their hand, the ZH article today on why the JPM bet went bad is a classic case of Dimon being on both sides of the trade and not understanding the consequences of his own policy decisions.

    The CCI/S&P ratio is a 3 year high. That is your oversold market segment and if it continues, hard assets will continue to flow east until there's nothing left except a couple of HFT computers at the COMEX wondering why there's no one left to play with.

    The Fed is going to act ag


  4. Gas prices, QE and the Presidential elections are linked. Expect this chart to explode to the upside after November 12.


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