Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
Stock Market Prepares for the Next Decline - 3rd Sept 15
Europe Rethinks the Schengen Agreement - 3rd Sept 15
BP Oil Company Moves past Mistakes But Still Feeling Price Pinch - 3rd Sept 15
EU Migration Crisis and Population Density, Why Cameron is Right, England Really is Full - 3rd Sept 15
Stock Market Return to Crisis: Things Keep Getting Worse - 3rd Sept 15
Dow Theory Stock Market Sell Signal Examined - 3rd Sept 15
How OPEC’s Attempt to Save Face Affects the Crude Oil Market - 3rd Sept 15
Crude Oil Price Forecast 2015 and 2016 - Video - 3rd Sept 15
The Real Threat from China’s Stock Market Crash - 2nd Sept 15
How Our “Mixed Economy” Created These Mixed-Up Markets - 2nd Sept 15
'Gravity' Is Returning to Stocks and Bond Markets - 2nd Sept 15
OPEC Divorce And Self-Destruction Thanks To Saudi Crude Oil Strategy? - 1st Sept 15
The Beginning Of A New Financial / Stock Market Cycle - 1st Sept 15
Three Things Every Master Trader Knows About Trading Options - 1st Sept 15
Chinese Yuan Revolution? - 1st Sept 15
Take Advantage of Record-High Auto Sales… Before This Bubble Bursts - 1st Sept 15
Pondering Hitler's Legacy - 1st Sept 15
Mainstream Media Goes Berserk - 1st Sept 15
Your Decisive Stock Market Plan to Follow Whilst Most Investors Shiver With Fear - 1st Sept 15
Are There Stock and Financial Markets Investing Opportunities For The Remainder Of 2015 - 1st Sept 15
Crude Oil Price Forecast 2015 and 2016 - 1st Sept 15
REPO Window Hidden $Trillion QE Monthly Volume - 31st Aug 15
Silver and Warnings From Exponential Markets - 31st Aug 15
Stock Market Calls Fed’s Bluff - 31st Aug 15
Why Some ETFs Led the Stock Markets Down Last Week - 31st Aug 15
Stock Market Collapse - Take The Opportunity To Bail Before It’s Too Late! - 31st Aug 15
The Most Important Market Chart on The Planet - 31st Aug 15
Stock Market 50% Retracement - 31st Aug 15
Stock Market Crash Red Alert for 2nd Downwave... - 31st Aug 15
Independant Scotland 1 Year on, UK Civil War If the SNP Fanatics Had Succeeded - 30th Aug 15
Gold’s 7 Point Broadening Top - 30th Aug 15
The Day the Stock Market Shook the Earth: Takeaways From the Dow’s 1,000-Point Drop - 30th Aug 15
Gold Price Rally Marked by Short Covering - 30th Aug 15
Aging Stocks Bull Market - 29th Aug 15
Economic Destabilization, Financial Meltdown and the Rigging of the Shanghai Stock Market? - 29th Aug 15
The Stocks You Should Be Buying After the Market Drop - 29th Aug 15
How I Learned to Stop Worrying and Love Market Fluctuations - 28th Aug 15
China's Yuan Devaluation: Why It Was "Expected" - 28th Aug 15
Stocks Go Nuts But the Question Remains – Will the Rally Stick? - 28th Aug 15
Fed’s Stock Market Levitation is Failing - 28th Aug 15
The Eight Energy Systems Driving The Stock Market Rout - 28th Aug 15
Silver Sold, then Squeezed - 28th Aug 15
U.S. Economic Fundamentals 'Look Good' - Bullard of St. Louis Fed - 28th Aug 15
Stock Market Margin Calls Mount - 28th Aug 15
Einstein, Physics, Gold and The Formula To End Economic Decay - 28th Aug 15
The 10 Best Stocks for Options Trading Plays in This Market - 28th Aug 15
Economics of a Stock Market Crash - 28th Aug 15
Currency Wars Detonate; Gold Refuses to Budge - 28th Aug 15
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

QE-3 Hyperventilating Hyperbole on Hyperinflation

Stock-Markets / Quantitative Easing Sep 21, 2012 - 08:07 AM GMT

By: Ned_W_Schmidt

Stock-Markets

Best Financial Markets Analysis ArticleWow! The hyperventilating hyperbole on hyperinflation to be brought about by QE-3 was near overwhelming. From some of what we read, QE-3 is to cure all the economic woes of the U.S., cause hyperinflation, crash the U.S. dollar, prevent male patten baldness, push $Gold to $2,400, and cause the death of our favorite pet. Oh, and the perennial favorite fantasy trotted out on a regular basis is Silver going back to $50. Could QE-3 really be all those things, or is it really Damp Squib One?


Federal Reserve Bank Credit Chart

In order to appease the Street, FOMC announced the purchase of $40 billion of mortgage backed securities each month. To help understand the meaning this policy let us consider the chart above. The blue line, using the left axis, is Federal Reserve Credit, or the size of the Federal Reserve's assets. We have extended it out a year at a rate of $40 billion per month. Before going on let us note that the rationale for this policy is totally frivolous, and it was adopted purely to appease the paper asset pushers on the Street.

First observation is that adding $480 billion, while admittedly too much, does not compare to QE-2, early part of graph. QE-2 added nearly twice that much in less than six months. Relative to QE-1 and QE-2, QE-3 is not much to talk about. Second, the red line, using right axis, is the year-to-year change in Federal Reserve credit projected out for the next year.

The absolute size of Federal Reserve Credit, blue line, influences the size of the money supply. Red line is a major determinant of money supply growth and the inflation rate. A year from now that growth rate might be as high as 15-20%. While that rate of growth is too high, it falls far short of that necessary to create hyperinflation. Given the structural problems in the U.S. economy being created by the Obama regime, the level of economic slack in the U.S. economy, and the unwillingness of bankers to make loans that create money, QE-3 is unlikely to live up to most expectations.

Two other portions of the FOMC announcement have also received more comments than they are worth. This policy is to be open ended and more could be added to these purchases. What is new in that? That has been the Federal Reserve's policy for decades.

In anticipation of QE-3, or as we prefer DS-1, the teenage traders on the Street pushed $Gold up by more than $200 and sent the U.S. stock market to an unjustified level. What should investors do given that set of market action and the likely ineffectiveness of QE-3?

Gold has firmly established itself as a portfolio asset. Investors are not likely to abandon it. $Gold's price does have short-term risk as most of the action has been in the derivative's market. Investors should by now be accustomed to volatility in the price of $Gold, and must simply learn to live with it. Further, Gold is the only insurance available to protect one from the Obama fiscal cliff set to cause the U.S. economy to fall into recession in January. Obama fiscal cliff is a greater worry than QE-3.

US$ / Chinese Yuan Chart

As Silver does not have the positive long-term outlook as is the case with Gold, investors should be looking at alternatives. An excellent one would be the Chinese Renminbi, shown in the above chart. Note it is approaching a new high. Investors owning Gold should be adding Renminbi to their portfolio. Those holding Silver, hoping to recover, would be betters served by switching their investment in Silver into the Renminbi.

An investment in Renminbi can be done with either bank deposit accounts, the preferred alternative, or ETFs. Latter uses non deliverable forwards, which might make them undesirable for many. Do not use exchange traded notes, ETNs.

Chinese Renminbi, along with Gold, is preferable to holding either U.S. dollars or Euros. Likely appreciation over time versus those two currencies is largely due to growing importance of the Renminbi as a currency in Asia, and the positive long-term prospects for the Chinese economy. Think of it as switching from the British pound to the U.S. dollar in 1913. While the negative outlook for the dollar does help the case for the Renminbi, the positive influence from China's growing economic importance is more important.

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History