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Are We Living in the Federal Reserve's QE2 Twilight Zone?

Economics / Quantitative Easing Nov 21, 2010 - 11:46 AM GMT

By: Trader_Mark


Best Financial Markets Analysis ArticleOn Monday, an old friend sent me a link to a now virally famous cartoon clip via YouTube. The clip is a depiction of the Federal Reserve's second round of quantitative easing in a simplified, humorous manner and has been viewed over 1.6 million times, not to mention it had a front and center showing on CNBC.

It comically poses questions that pretty much sum up the entire state of our economy right now. Is this some kind of a nightmare? Are we in an episode of The Twilight Zone?

Please watch the clip before you continue.

I couldn't have said it better myself.

Quantitative easing, in theory, should put money into consumers' hands to spend and into companies' hands to hire. The Federal Reserve is worried about deflation.

But is this really the case?

Let's take a look at prices of the things over the past year that we use every day and see...

Energy Prices Are Up...

Crude oil futures were trading in the upper $70s in November of 2009 and in early November 2010 spiked up to over $87. That's a roughly 13% jump. In the world of natural gas, we're looking at a very similar story in our cost as consumers. Even though natural gas futures were flat(ish) compared to last year, you as the end user have been paying higher prices from April up until September.

And Are Is Electricity Prices...

According to the EIA (U.S. Energy Information Association), our average cost in cents per kilowatt-hour for 2009 was $11.55. Up until August of this year the average was $11.53, but don't forget that September, October and November are still relatively high usage months for many homes, so expect that number to rise as well.

Getting to and from your job or job interviews and running errands is definitely costing you more: The average price of a gallon of gasoline is up 26.3 cents from a year ago, which represents an almost 9% increase in cost.

AAA says that the average driver travels 15,000 miles per year. Assuming two drivers per household getting an average of 20 mpg, that's 1,500 gallons of fuel. If fuel jumps another quarter, we are talking a $750 per year increase for the average couple with no kids.

And -- You Guessed It -- So Are Food Prices...

I always found it humorous when analysts strip out food and energy when looking at consumer prices! As a human being, I need to keep myself at a certain temperature and eat and drink just to stay alive! While energy costs are moving higher, feeding your family is really costing more than it did last year.

Raw commodities alone are through the roof!

  • Wheat was around $4.90 a bushel a year ago, now it's about $6.50, +33%.
  • Corn was trading for $4 a bushel, today $5.50, +27%.
  • Cotton, sugar, coffee, metals are all soaring to record highs.

Raw commodity price increases translate to final product costs. According to a survey published on Nov. 14 by MKM partners, the price of an 86-item average grocery list at Walmart (the nation's largest discount retailer) was up 0.6% in only two months, which would put prices up almost 4% a year from now...

The BLS (Bureau of Labor Statistics) in its latest report noted a 1.4% increase in food and beverage consumer prices, a 4.8% increase in transportation costs and a 3.4% rise in medical costs. Apparel was moderately lower, down 1.2%. Check out the full report from the Bureau of Labor Statistics.

The Other Necessities: Employment and Housing

Currently, 9.6% of the workforce (not population) is unemployed; this is down just slightly from a year ago. Since December 2009, employment in the private sector has risen by only 1.1 million, or less than 0.4%. QE1 did little to help incentivize companies to bolster employment. Drops in unemployment have been much greater in the past with no QE.

So What About the Things That Should Be Rising?

For most Americans, the biggest asset and source of comfort, pride and shelter is a home. While the stock market is up and mortgage rates are low, (30-year rates are down about 62 basis points in the past year according to Freddie Mac), banks are still struggling to let go of their cash. They are hoarding their cash in record amounts and making it harder than ever to get a loan. Home prices are actually down an average of 0.2%

Americans aren't seeing huge gains in salary!

I don't know of many folks getting big raises in the past year, but according to the BLS, average hourly earnings rose 0.7% (seasonally adjusted, which can be tricky) from October 2009 to October 2010. They did note that the average worker is putting in 1.8% more hours per week (that could be because the average company is trying to squeeze every last bit of productivity from its existing workers to stave off hiring new ones that cost money).

The Bottom Line
Inflation is present, prices are rising and the statements made in the video are correct to an extent.

The Federal Reserve's actions are forcing us to make hard asset purchases (gold, silver, housing, commodities, etc.) in order to protect ourselves from inflationary pressures. The problem is that we the consumers are struggling to not only feed ourselves and our families, but make ends meet with the ever-increasing costs of goods and services. Many families either are scared or can't afford (or qualify for) a mortgage, or can't afford to buy assets. And these rising costs are inhibiting our spending, not fueling it.

The Federal Reserve defends its actions by stating that quantitative easing funds won't make it to the money supply and cause inflation. But I think it IS the average American's money supply that needs boosting right now.

If you have the means, look at distressed housing, protect yourself by balancing your portfolio with hard assets, but don't overload -- we now have China's monetary tightening to contend with...

P.S. If you want to break free from whatever's been holding you back and killing your dreams -- and achieve all your goals faster -- then you need to get your hands on a copy of Michael Masterson's new book The Pledge: Your Master Plan for an Abundant Life. Click here to get all the details.

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source :

By Jared Levy

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

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