9/16/2011 4:41 PM ET
A pivotal week lies ahead, as US and European central banks decide whether to push more cash into the economy. But money printing is part of the problem.
Bill Fleckenstein
If there is one thing I have learned in my investing career, it is to be wary of predictions -- either making them or following them. I am, however, an advocate of considering different (sometimes opposing) scenarios so that I am prepared for what I consider to be the likeliest outcomes.
So, at the risk of looking foolish, it is in that spirit that I offer up my expectations regarding the Sept. 20-21 Federal Open Market Committee meeting.
First off, I think it is a virtual certainty that the FOMC will unveil QE3, a, a third round of quantitative easing. And there is a reasonably high probability that, whatever form this latest round takes, it will be fairly dramatic and involve a real commitment to more money printing -- not just the more-limited appRetirement homes under $100,000roach known as Operation Twist.
How does quantitative easing work?
If Federal Reserve Chairman Ben Bernanke believes anything he has written about his life's study of economics, he must think now is the time for bold action. The fact that next year is an election year will make the Fed disposed to act sooner rather than later in order to avoid being perceived as political.
I have received a few emails from subscribers to my daily column at FleckensteinCapital.com asking me if I thought the fear of criticism from politicians might make the Fed afraid to launch QE3 at all. I actually think the opposite: Those few critics don't matter compared with the influence-peddlers who are begging for more quantitative easing, by which the Fed buys bonds to push money into the economy.
Not the least of these peddlers is Rep. Barney Frank, D-Mass., who wants to strip the regional Fed presidents of their FOMC voting rights. (For those who don't follow this closely, three of the dissenters at last month's FOMC meeting were regional presidents who wanted a tighter monetary policy. Thus, Frank's legislation is the Democratic establishment's shot across the bow to get the Fed to make its free-flowing monetary policy even more "accommodative.")
More importantly, I believe Bernanke thinks he is the solution to the problem. (He clearly doesn't realize that the Fed is the problem, but that is a different issue.)
Now, I'm not advocating for more QE. But as investors or speculators we must deal with what the Fed is likely to do, not what it should do.
I also expect we may see more coordinated moves by the Bank of England, the European Central Bank and perhaps others. Both of those institutions were rather quiet during the recent escalation of the European debt turmoil, at least until recently. This may be because, behind the scenes, their central bankers are working in concert. That may also explain the unusually worthless rhetoric that came out of the most recent Group of Seven meeting.
The principle of the dog that didn't bark continues to be a storyline for Europe, where they keep trying to stall without taking much action, but to what end is unclear. About every other hour this week there was a rumor that one meeting or another was about to occur, with the unstated but implicitly optimistic goal of solving the European debt crisis.
I have been amazed that they have managed to limp along this far, but if they don't do something aggressive pretty soon, their entire banking system is going to collapse. Time is definitely against them and, as I say, if something big and bold isn't announced this week, I expect massive red ink in world equity markets. The epicenter will be European bank stocks.
A 3rd round???........boy oh boy I just can't see it. That could really backfire for Obama. The hoped for result of good times could disappear well in advance of the election. Would they really chance that? And if they would chance it - damn that's a scary thought - what does that say about the state of things?
I'm just saying is all.........
Henry Ford couldn't have said it any better.
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