The QE Cocaine: Commodity bulls begin to snort

Last Updated : 30 April 2013 at 05:25 IST

Quantitative Easing is deemed the holy grail of monetary policy. Unconventional, out-of-the-box, revolutionary and least of all evolutionary, the QE measures are something that everybody looks forward to these days; investors, traders, hedge funds, in short all market participants.

The markets have become QE fetish to such an extent that QE is now deemed the new-normal in monetary policy. It has become an addiction: QE is the market version of cocaine! No QE, no feel good.

Now we also know there is a widespread consensus that politicians are a lazy lot. They always seem to find the populist DNA of things that would significantly contribute to their account balance in electoral banks.

Building and constructing one’s way out of a recession is tough and warrants industrious days and sleepless nights from the people (and hence the least populist), but floating a QE and creating a feel good is easier. You just have to keep the Mints busy, as simple as that!

In a QE measure, the governments often buy back the debts they have issued. These debts are often borne by the financial behemoths in the first place. They often happen to be banks. What they are supposed to do with the money is to enhance lending.

But, in a crisis that has been sparked by reckless lending, these banks would find it prohibitive to lend. Besides, it is easy money that they have got in their kitty as the central bank would have bought back the debt paying a premium so as to incentivise a debt sale by these financial institutions.

In other words, the price you have to pay to own some debt would have significantly gone up in the market place when Bernanke, or for that matter any other central bank chief, begins to discuss this initiative.

What these banks do is, they invest this cheap money in equities and commodities and whatever other lucrative investments they can put their hands on.

When billions in money hit the markets, markets invariably go up; there is a feel-good everywhere. Bulls go for their victory lap and bears retreat. Everybody makes a kill.

Not bad!

But the feel good has a dangerous political side to it. When people mistakenly feel that a single dose of QE is capable to address their issues, the issue on the other hand remains unaddressed. It would lie dormant for a while or simply changes its status to stealth mode.

Hence, once the first round of QE waves subside, it so happens that the market loses momentum. The core reason behind the financial crisis once again tumbles out of the closet. And that is ugly. So there is clamour for the next round of shot. And governments dance to the tune. QE2 follows!

This serial killing or slow poisoning continues until the economy would turn hyper inflationary.

Now that the price of gold has come down significantly along with all other commodities, except for agriculture commodities, there are hopes of QE measures to be maintained by the markets. But the said need is not presented in the way people would understand.

It reads like this: “futures on the Comex climbed on speculation that the US Federal Reserve would continue to maintain aggressive buying of bonds and securities…” we know the language; we have been here before. We know that another shot is necessary, we crave for it, and we are just infants who want to be spoon-fed.

The bulls who snort.

What a pity! 

As published here: http://www.commodityonline.com/news/the-qe-cocaine-commodity-bulls-begin-to-snort-54193-3-54194.html

Commodity markets: Calm after the storm or before the storm?

Last Updated : 17 April 2013 at 16:00 IST

I have exhausted all the adjectival arrows in my arsenal that would best describe the recent events that played out in the global economy and markets.

Shocking, weird, catastrophic, bloodbath, butchery, massacre...the list can be representative of all the gory words in Oxford English Dictionary.

When it starts, it starts small, just like a bowl of snow that would in turn become a giant snowball. In this case, it started with the small Mediterranean island nation of Cyprus. The Cypriots were asked to give up a portion of their bank accounts in exchange for a bailout, first time in the history of Eurozone. This was rejected by the Cypriot Parliament and a crisis followed. 

Hectic parleys followed and Cyprus spared depositors with less than 100000 Euros in their accounts. But a bank was put in coffin and depositors with more than 100000 Euros were bound to lose 60% of their bank account balance.

Capital controls were put in place for the first time in Eurozone history.

Then a phase of calmness. Days passed without much events happening.

Suddenly, one fine morning Cyprus' creditors told that the rescue would cost some 23 billion Euros and Cyprus will have to raise 13 billion Euros; 6 billion Euros in excess change.

The news sparked speculation that Cyprus may have to sell its gold reserves to raise the money. The Cypriot central bank denied that such a move has been discussed. But the next day, spokesperson of Cyprus government said that the option was on the table. 

This sparked the sell off in gold as thoughts ruled that other central banks in the Eurozone periphery may be forced to follow suite. Meanwhile S&P 500 hit all time highs.

A bloodbath followed in gold and silver. Gold began to plunge to multi-year lows. China GDP data too spooked markets.

The thicket of events now looks cleared as gold and silver markets have stabilised.

The question lingers: is this calm after the storm or before the storm? Further data from Eurozone and US, not to speak of China would provide the necessary clues to the answer. 

As published here: http://www.commodityonline.com/news/commodity-markets-calm-after-the-storm-or-before-the-storm-53966-3-53967.html