Commodity Prices Falling Despite QE

Traditional wisdom tells us that when the money supply expands the price of commodities rises. Today Robert Prechter takes a look at what has actually happened to commodity prices since 2008 during a period when theoretically the FED has been pumping up the  money supply. ~Tim McMahon, editor

Commodities Falling Despite QE: What Does That Mean?

Robert Prechter: “Charts tell the truth. Let’s look at some charts.”

By Elliott Wave International

During QE3, the latest round of the Fed’s quantitative easing, the stock market rose. We all know that.

But did you also know that commodities fell?

That’s right: QE3 had zero effect on commodities — or maybe even a negative effect. In fact, an unbiased observer of the trend might conclude that the Fed drove commodity prices down.

That, of course, would be heresy to investors who believe that the Fed’s actions have been inflating all financial markets.

What should you make of the fact that commodities have failed to respond to the massive, historic, unprecedented central-bank stimulus? We see it as a red flag.

What’s more, you may be surprised to know that not one of the Fed’s stimulus programs — QE1, QE2 and QE3 — pushed up commodity prices.

As Robert Prechter, the president of Elliott Wave International, wrote in his November 2013 Elliott Wave Theorist, “Charts tell the truth. Let’s look at some charts.” These four charts and analysis that he published in May, July, and November 2013 tell the story:

(Robert Prechter, July 2013 Elliott Wave Theorist)

The CRB index of commodities has been losing ground for more than two years, as shown in Figure 3. Notice the four short arrows on the chart. Based on their positions, you might think they would mark the timing of accurate sell signals generated by a secret indicator. But there’s no secret indicator. These happen to be the times at which the Fed launched its inflationary QE programs!


Investors almost universally take news at face value rather than [Read more...]

The Effects of Quantitative Easing

Quantitative Easing Effects-

You have probably heard that the massive inflation of the money supply through Quantitative Easing is going to result in hyperinflation or at least massive inflation. But so far that hasn’t happened. As a matter of fact since the end of QE2 in June of 2011 inflation rates have fallen from 3.63% in July 2011 to 1.41% in July 2012. How is that possible? The first reason is that the FED is playing a game with the banks. The FED loans money to the Banks at nearly Zero percent interest the Banks turn around and loan the money to the Government at 3% interest to finance the deficit. This gives the banks plenty of profit to shore up their sagging balance sheets.

But there is another reason that QE1 and QE2 didn’t result in massive inflation.

QE1 lasted from from November 25th 2008 through March 31, 2010 and the FED started by purchasing $500 Billion in Mortgage backed securities. Most of these securities were virtually worthless at this point. But just a few months earlier they were considered part of the larger money supply. The owners of this junk (when it was fully valued) assumed they had assets worth billions. But as the market realized that it was worth much less, so those billions in assets evaporated. So when the FED bought them they were simply taking assets that were worth billions a few months before and putting that money that had evaporated back into the economy. While putting worthless securities onto their balance sheets.

In March 2009, the FED announced that it will purchase another $750 Billion in junk mortgages (Mortgage Backed Securities) but the inflation rate is still heading down. So the FED buys another $100 Billion in Fannie Mae and Freddie Mac debt and then resorts to old fashioned “money printing” methods by buying $300 Billion in Treasury Securities.

So in effect the FED bailed out the owners of this junk debt and pumped up the money supply at the same time by converting worthless junk into “valuable” greenbacks. At that point the FED had purchased 1.25 Trillion in Mortgage Backed Securities and $175 Billion in Agency debt.

If we look at this chart of the inflation rate we can see the effect that this accounting magic had. [Read more...]

What is Quantitative Easing?

Is Quantitative Easing Money Printing?

Quantitative Easing is often referred to as “money printing” or a way for the government to increase the money supply. According to Wikipedia, quantitative easing is different from the typical method whereby governments buy treasury debt to increase the money supply. In QE1  when the market was panicked, and banks didn’t want to buy government bonds, the central bank implemented “quantitative easing” by purchasing relatively worthless financial assets (like mortgage backed securities) from banks and giving them new electronically created money.  So this is straight forward money printing compared to the more round about traditional method.

Thus Quantitative Easing increases the excess reserves of the banks creating liquidity for the markets.

Effects of Quantitative Easing

Quantitative Easing

Milton Friedman

Legendary economist, Milton Friedman once said: “Inflation is always and everywhere a monetary phenomenon.” In other words, inflation is always caused by printing too much money. But the results are seen in prices of commodities like food, clothing and energy after the printed money works its way through the economy.

Generally, after a round of “Quantitative Easing” (aka. Money Printing) it usually takes one to two years for it to show up in popular pricing. The time lag gets smaller as people catch on to the cause and begin to anticipate more inflation. The time lag is also why many people fail to see the correlation between money printing and inflation. [Read more...]

Fed To ‘Hold Off’ On QE 3

We noted extreme levels of optimism earlier today. What could possibly trigger a correction in stocks and commodities? If the Fed fails to signal and/or announce another round of quantitative easing (QE), it would undoubtedly leave the markets disappointed.

The Fed uses the Wall Street Journal (WSJ) as a medium to communicate with the markets. It is possible someone at the Fed picked up the phone and said, “We need to temper short-term expectations for another round of QE. Can you help us out?” Friday’s WSJ has an article titled “Fed Holds Off For Now on Bond Buys”. Notice the word “may” is not included. Here is the first paragraph of the article:

Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.

The statement above is very direct; it does not contain “expected to” or “analysts believe the Fed will”. While anything can happen next week, the WSJ is always [Read more...]

Why Quantitative Easing Has NOT Brought Back Inflation

When the FED began quantitative easing to halt the deflationary crash of 2008, almost everyone was convinced that it would result in massive inflation. The lone voice proclaiming that it wouldn’t stop the deflationary express train wreck was Robert Prechter. In the following article Prechter explains why inflation never materialized. It is an excerpt from Prechter’s, Independent Investor eBook 2011. I hope you enjoy this short excerpt. See below for details on how to get the eBook in its entirety for free. ~ Tim McMahon, editor [Read more...]