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Economic Update for the Week of 9/14/2012

And finally, The Fed announces QE3! The plan is to buy $40 billion worth of mortgage backed securities per month until things get better. To quote our friend Buzz Lightyear, QE to "infinity and beyond!" This sounds like the "unlimited" bond buying the ECB (European Central Bank) just announced with the difference that The Fed will be printing dollars to make these purchases. Anticipation of QE3 seemed obvious as I have been writing about however Uncle Ben really pulled out the Bazooka this time. So what happens when it doesn't work? What else do you have up your sleeve Ben? 

Equity markets along with energy and precious metals all shot higher on news of QE3. As I wrote previously, I think the hard assets will rally on this news until they realize that inflation is not coming and then prices will come back down. Bernanke is doing everything he can to prevent deflation yet the forces of deflation are still there. The equity markets are overbought and the rally is looking stale, and with earnings season just around the corner, don't expect it to continue. Earnings reports from corporations from the last round were already softening and while margins are high this is due to cost cutting which cannot continue forever. Sales and revenues are falling and unfortunately QE3 is not likely to encourage the average consumer to get out there and spend more money. 

The Fed hopes that people will go out and start buying homes which will help the housing market recover. For this to work, people need to have the ability and the desire to buy homes. Do you know anyone who is not willing to buy a home because rates are too high? Me neither. And while this may push some marginal buyers off the fence it simple pulls in future demand to the present. Plus what happens when the banks have all of these low interest mortgages and rates go back to normal levels? These low rates will make future sales even more difficult because people won't want to move because when they do, they will lose their low rate. We should think about the unintended consequences that will plague us in the future. 

Angry yet? If not you will be when you read this next paragraph. Congress passed a $500 billion spending bill that will keep the US Government funded until March of 2013 with no fiscal responsibility whatsoever. The US has not had a balanced budget in years which is one of Congress' main responsibilities yet we continue to let them spend us broke while paying them tons of money. They are not doing their job, taking the easy way out of adding more debt and sending us (and our kids) the bill. I don't know about you but this makes me furious. Congress is shirking one of their main responsibilities in administering the affairs of The United States of behalf of our people and should be fired for their failure to do their job of creating a balanced budget, or better yet prosecuted for breach of fiduciary duty. Why are more people not outraged about this? California has the right idea; they have a law that their legislators do not get their paychecks unless they pass a balanced budget. 

Ok enough on that. Inflation as measured by the Consumer Price Index (CPI) came in at 1.7% over last year which was about the same as last month. We are seeing inflation, its just not more than normal, in fact, 1.7% is lower than the long-term average of about 3.72%. With QE3 however, we might see it go higher but not too much because about 1/3rd of the CPI is based upon housing costs. 

Industrial production fell 1.2% and capacity utilization was down by the same number. This tells us that US manufacturing is slowing down and reducing output which is typical for a recession. The problem is that we are slowing down from an already low lever. Expect more signs of recession to start popping up in everything but prices. 

Jobless claims jump to 382,000 which has started to show clear signs of a trend in higher jobless claims. Things just are not getting better, rather they are getting worse and while the dual bazookas of the ECB and the Fed will probably send the equity markets in a rally for perhaps many weeks if not months, it just won't last. It is time to really think about what you can do to starting moving to be conservative if you are not already. Think of 1999 when the equity markets were rallying high; who would want to miss out on that? Well we know what happened and I think we are getting closer and closer to the point where the bottom is going to fall out. 

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