Do the Yanks need QE3?
by Peter Switzer
Standby for talk of QE3 in the US after Wall Street failed to respond positively to the overdue agreement on the deficit and the debt ceiling. In what had to be a shock for many, stocks had a big sell-off – so how worried should we be?
You can be worried but I am not – this goes with the patch of investing and as long as you have good companies or good funds, you will come out on top.
So why the sell-off? It’s not because the debt deal will be written off by the debt ratings agencies. The deal, especially with the proviso that there will be automatic deficit reductions measures if the Congress does not come up with other measures to reign in the deficit, means that debt will be pulled back over time. But what could be the big worry for ratings agencies is the major reason why Wall Street dived overnight.
There are doubts about the power of the US economy to avoid a double dip recession. I think they will and so do most economists who are paid to know what the forward indicators are saying about the economy.
Sure they missed the GFC but economists aren’t paid to do the job of ratings agencies, which ironically stuffed up in not rating the financial derivatives products related to sub-prime loans.
- The Dow was trashed, off 265.87 points, or 2.19 per cent, to 11,866.62.
- The S&P 500 was smashed down 32.89 points, or 2.56 per cent, to 1254.1.
- That’s an eight-day losing streak not seen since the GFC days of October 2008.
- And the fear index or VIX is now above 24 but this is still not at panic stations.
Clearly, the worry has now gone from debt and defaults as well as a possible downgrading of America’s Tripe-A rating to whether the economy will spiral into a double dip recession.
The latest run of economic data has been weak but economists say there are mitigating circumstances and most think it is a soft patch. And while you might be saying ‘sure, it is’, the results of US companies shows that if there is a recession and we can’t see it, it’s not showing up in profit and sales figures.
The jury is still out on the US economy and the stock market’s short-sellers and hedge funds will make play while doubts remain.
On the economics front, US consumer spending fell in June and that’s the first fall since September 2009.
The next big watch, and it is the main reason why the market could be taking a position before the data is released, is the jobs report on Friday in the US.
If it is bad, the market goes down. If it is good, then this sell-off should be reversed.
By the way, if it is bad we could hear QE3 talk but I hope we don’t. I’d rather see a US recovery without any more central bank help.
By the way, European debt problems are again spooking the market and also explains why sellers outnumber buyers at the moment on stock markets.
One final point must be made. Fitch, the debt ratings agency is more concerned about another US recession than they are about the actual size of the debt. The debt is big but it is easier to pay back if there is no recession. At this stage, Fitch has confirmed they have no intention to downgrade the triple-A rating.
By the way, it all seems anxiety-creating but this is the consequence of dodging a Great Depression.
And I reckon what we have here is miles better than a Great Depression.
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Published on: Wednesday, August 03, 2011
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