Four Reasons Why The Fed Will Not Announce QE 3 This Friday

The biggest even this week is Ben Bernanke’s Jackson Hole Speech which will take place on Friday August 31. It was at Jackson Hole in 2010 that Bernanke hinted at QE 2. With that in mind, many investors believe that the Fed is about to unveil or at least hint at a similar large-scale monetary program this Friday.

We, at Phoenix Capital Research, disagree for three reasons. Number one, stocks are at or near four-year highs. With stocks at these levels, there is little reason for the Fed to use up any of its remaining ammunition.

Secondly, food prices are soaring due to the worst drought in 56 years. Some 63% of the lower US 48 states are experiencing a drought. As a result of this, the USDA has said that 50% of the US’s corn crop will be in poor to very poor condition.  Soybeans are in similar shape.

Thirdly, gas prices are near their all time highs.

As far back as May 2011, Ben Bernanke admitted publicly that the consequences of QE (higher food and energy costs) were outweighing the benefits (higher stock prices).

With stocks where they are today and food and energy prices where they are today, there is little reason for the Fed to unleash QE 3 or any large monetary program. Indeed, if the Fed were to do so, it would most assuredly cost Obama the election as the ensuing inflationary pressure would hit voters’ pocketbooks.

With the election less than 100 days away and Mitt Romney and the GOP increasingly targeting the Fed and specifically Bernanke as a problem, the Fed isn’t going to do anything that could risk Obama losing his bid for re-election. This is especially true given that there really isn’t a sound argument for more QE at this time: food prices, energy prices, and stocks are high, while interest rates are at or near all time lows.

There is a fourth and final reason why QE is not in the cards. QE is a policy through which the Fed prints money to buy Treasury or Agency debt from the banks. The problem with this is that these bonds are the senior most assets that the banks use to backstop their trading portfolios.

In the case of the TBTFs, these banks only have $7 trillion in assets back-stopping over $200 trillion in derivative trades. The last thing these banks want is to swap out their senior most assets (Treasuries and Agency bonds) for more cash (remember the banks are already sitting on over $1 trillion in cash in excess of their required reserves).

In simple terms, the banks don’t want cash. They want bonds, which they can use to leverage up their trading portfolios: their primary source of revenue with interest rates at or near zero.

Indeed, Bernanke has all but admitted this recently, saying “I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies it would hurt the market.

Why would it hurt the market? Because the banks NEED assets/collateral. And QE takes this out of the system.

For this reason, we believe it is highly unlikely the Fed will announce QE at this time. There really is no reason for it to do especially since QE would in fact hurt the big banks: the very institutions the Fed has been trying to prop up.

On that note, I’ve already alerted my Private Wealth Advisory subscribers to a handful of investments that will explode higher when the Fed disappoints this Friday. It is precisely this kind of thinking ahead and “unquantifiable” analysis that has allowed us to lock in 73 winners and only one loser over the last 13 months. And I fully expect we’re going to find similar success over the coming year.

The reason? Because we look beyond simple financial statements and press releases to find the “unquantifiable” opportunities (and risks) that most newsletter firms aren’t aware of. In today’s markets, everyone has access to the same information, the only way you can crush the market is by seeking out the underlying realities lurking “between the lines.” That’s precisely what we excel at Phoenix Capital Research. And it’s why our research has been featured everywhere from RollingStone magazine to The New York Post, Crain’s New York Business, CNN Money, and elsewhere.

To find out more about our proprietary research methodologies and start receiving my bi-weekly investment research reports as well as real time “buy and sell” alerts via email, you need to take out a subscription to Private Wealth Advisory. To do so…

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Graham Summers

Posted by Phoenix Capital Research